Uganda's Recovery: The Role of Farms, Firms, and Government

REINIKKA & COLLIER
W O R L D B A N K R E G I O N A L A N D S E C T O R A L S T U D I E S
Uganda is rightly regarded as a pioneer of macroeconomic stabilization

and structural adjustment in Sub-Saharan Africa. Uganda’s Recovery:
The Role of Farms, Firms, and Government consists of a series of studies
analyzing the responses of private sector agents—households and
firms—and of the government itself to the reforms implemented since
the late 1980s in a society recovering from a traumatic civil conflict.
Drawing on a wealth of quantitative data from a series of household
Uganda’s Recovery
surveys and from surveys of firms, the book presents an analysis of the
evolution of incomes, poverty, and investment during the 1990s.
Unique in providing comprehensive analysis of policy reform in a
The Role of Farms, Firms,
Uganda’s Recovery
Sub-Saharan African country, the book is designed to share the lessons
of reform with a wide audience and stimulate informed debate among and Government
development practitioners.
“This book provides a truly remarkable record and a persuasive analysis

of Uganda’s post-conflict reconstruction and sustained economic
liberalization. It helps shed light on the complex interplay of behavior,
policy tradeoffs, and economic management against immense odds. It is
a must read for analysts, policymakers, and development practitioners.”
Benno Ndulu, Lead Economist, The World Bank; former
Executive Director, African Economic Research Consortium
“This excellent book highlights three key aspects of governmental
The Role of Farms, Firms, and Government

behavior which account for Uganda’s remarkable recovery in the last
fifteen years—provision of internal peace, ending of predatory taxa-
tion, and maintenance of fiscal discipline. However, the book is not
complacent and emphasizes the challenges facing Uganda as it goes
from recovery to sustainable growth and poverty reduction.”
Ravi Kanbur, T.H. Lee Professor of World Affairs and Professor
of Economics, Cornell University
EDITED BY
RITVA REINIKKA
THE WORLD BANK
1818 H Street N.W.
Washington, D.C. 20433 USA
PAUL COLLIER
Telephone: 202-477-1234
Facsimile: 202-477-6391
Internet: www.worldbank.org
E-mail: feedback@worldbank.org
THE
ISBN 0-8213-4664-4 WORLD
BANK
Uganda’s Recovery
Uganda’s Recovery
and Government
Edited by
Ritva Reinikka
Paul Collier
The World Bank

Washington, D.C.
Copyright © 2001 The International Bank for Reconstruction
and Development / THE WORLD BANK
1818 H Street, N.W., Washington, D.C. 20433, USA
All rights reserved

Manufactured in the United States of America
First printing March 2001
The World Bank Regional and Sectoral Studies series provides an outlet for work that is relatively
focused in its subject matter or geographic coverage and that contributes to the intellectual
foundations of development operations and policy formulation. Some sources cited in this
publication may be informal documents that are not readily available.
The findings, interpretations, and conclusions expressed in this book are entirely those of
the authors and should not be attributed in any manner to the World Bank, to its affiliated
organizations, or to members of its Board of Executive Directors or the countries they represent.
The World Bank does not guarantee the accuracy of the data included in this publication and
accepts no responsibility for any consequence of their use.
The boundaries, colors, denominations, and other information shown on any map in this
volume do not imply on the part of the World Bank Group any judgment on the legal status of
any territory or the endorsement or acceptance of such boundaries.
The material in this publication is copyrighted. The World Bank encourages dissemination
of its work and will normally grant permission to reproduce portions of the work promptly.
Permission to photocopy items for internal or personal use, for the internal or personal use
of specific clients, or for educational classroom use is granted by the World Bank, provided
that the appropriate fee is paid directly to the Copyright Clearance Center, Inc., 222 Rosewood
Drive, Danvers, MA 01923, USA; telephone 978-750-8400, fax 978-750-4470. Please contact
the Copyright Clearance Center before photocopying items.
For permission to reprint individual articles or chapters, please fax a request with complete
information to the Republication Department, Copyright Clearance Center, fax 978-750-4470.
All other queries on rights and licenses should be addressed to the Office of the Publisher,
World Bank, at the address above or faxed to 202-522-2422.
Cover art: Hand shield, Uganda.

Wood, pigment. Pastoral nilotic peoples of Uganda.
This work is included in the collection of the World Bank Art Program, which makes
particular efforts to identify artists from developing nations and to make their work available
to a wider audience.
Library of Congress Cataloging-in-Publication Data
Uganda’s recovery: the role of farms, firms, and government / edited by Ritva Reinikka,
Paul Collier.
p. cm.
Includes bibliographical references and index.
ISBN 0-8213-4664-4
1. Uganda--Economic conditions--1979- 2. Uganda--Economic policy. 3. Uganda--
Politics and government--1979- I. Reinikka, Ritva. II. Collier, Paul.
HC870.U45 2001
338.96761--dc21 00-049791
Contents
Acknowledgments .............................................................................................. ix
Contributors ......................................................................................................... xi
Foreword ............................................................................................................. xiii
Map of Uganda .................................................................................................. xvi
1. Introduction ................................................................................................ 1
Paul Collier and Ritva Reinikka
Postconflict Recovery and Macroeconomic Reforms ............................. 5
Households .................................................................................................. 6
Firms ............................................................................................................. 7
Government ................................................................................................. 8
Sustainability and Lessons ....................................................................... 10
References .................................................................................................... 11
Part I. Postconflict Recovery and Macroeconomic Reforms ....... 13

2. Reconstruction and Liberalization: An Overview ............................. 15
The Inheritance of Disorder ..................................................................... 16
The Restoration of Peace .......................................................................... 21
Growth Policies in the Context of the Postconflict Economy ............. 24
Economic Liberalization .......................................................................... 31
Impact on Investment and Exports ........................................................ 38
The Role of Aid .......................................................................................... 39
v
vi Contents
Conclusions ................................................................................................ 44
References ................................................................................................... 45
3. Exchange Reforms, Stabilization, and Fiscal Management ............. 49

Mark Henstridge and Louis Kasekende
Exchange Reforms .................................................................................... 50
Legalizing the Parallel Market and Exchange Rate Unification ........ 52
The Achievement of Macroeconomic Stability ..................................... 56
Planning and Implementing Fiscal Policy ............................................. 58
Targets, Tradeoffs, and Costs in Macroeconomic Management ......... 71
Conclusions ................................................................................................ 76
References ................................................................................................... 77
Part II. Household Responses and Constraints ........................... 81

4. Changes in Poverty and Inequality ...................................................... 83
Simon Appleton
Changes in Mean Consumption Per Capita .......................................... 87
Defining an Absolute Poverty Line for Uganda ................................... 89
Sectoral Decomposition of Poverty Changes ...................................... 105
Summary and Conclusions ..................................................................... 111
Annex 4.1. Methodology ......................................................................... 113
References .................................................................................................. 119
5. Rural Households: Incomes, Productivity, and Nonfarm

Enterprises .......................................................................................... 123
Klaus Deininger and John Okidi
A Panorama of Rural Uganda ............................................................... 124
Intertemporal Changes in Household Income ................................... 137
Agricultural Productivity and Nonfarm Enterprises ........................ 143
Conclusions .............................................................................................. 152
Annex 5.1. Tables of Estimation Results .............................................. 154
References ................................................................................................. 174
6. Crop Markets and Household Participation ..................................... 177

Donald Larson and Klaus Deininger
Market Participation in the Early 1990s ............................................... 178
A Market Model for Community Trade ............................................... 180
The Determinants of Market Participation .......................................... 191
The Effects of Price Changes on Household Welfare ......................... 194
Are Crop Markets Developing? ............................................................ 195
Conclusions and Policy Implications ................................................... 202
Annex 6.1. Calculating Household Welfare ........................................ 203
References ................................................................................................. 203
Contents vii
Part III. Firm Responses and Constraints ................................... 205

7. Confronting Competition: Investment, Profit, and Risk ............... 207
Ritva Reinikka and Jakob Svensson
Investment Response .............................................................................. 209
Constraints to Investment ...................................................................... 216
Conclusions and Policy Recommendations ........................................ 226
Annex 7.1. Data and Estimation Results .............................................. 228
Annex 7.2. Derivation of the Investment Equation ............................ 231
References ................................................................................................. 232
8. Productivity and Exports ...................................................................... 235

Bernard Gauthier
Trade Liberalization, Exports, and Productivity ................................ 236
Enterprise Responses to Changing Incentives .................................... 238
Export Response ...................................................................................... 246
Conclusions .............................................................................................. 252
Annex 8.1. Productivity Measures ........................................................ 253
References ................................................................................................. 265
Part IV. Government Performance from a Beneficiary

Perspective ..................................................................... 269
9. A Quest for Revenue and Tax Incidence ........................................... 271
Duanjie Chen, John Matovu, and Ritva Reinikka
Revenue Trends and Tax Reforms ........................................................ 276
Method and Data for Tax Incidence Analysis ..................................... 278
Tax Incidence on Households ............................................................... 280
Marginal Effective Tax Rate for Firms .................................................. 281
Cross-Border Comparison for Foreign Firms ..................................... 288
Compliance and Tax Administration ................................................... 292
Conclusions .............................................................................................. 295
Annex 9.1. Household Incidence Analysis and the Concept of
Welfare Dominance ............................................................................ 296
Annex 9.2. Marginal Effective Tax Rate ............................................... 298
Annex 9.3. Figures and Tables for Household Incidence
and METR ............................................................................................ 302
References ................................................................................................. 316
10. The Cost of Doing Business: Firms’ Experience

with Corruption ................................................................................. 319
Jakob Svensson
The Data ................................................................................................... 321
Incidence, Level, and Effects of Corruption ........................................ 321
Case Studies ............................................................................................. 331
viii Contents
Conclusions .............................................................................................. 334

Annex 10.1. Ranking of Constraints and Payment of Bribes ............ 336
References ................................................................................................. 340
11. Recovery in Service Delivery: Evidence from Schools and

Health Centers ................................................................................... 343
Ritva Reinikka
Diagnostic Survey ................................................................................... 346
Education and Public Spending ............................................................ 347
Health Care and Public Spending ........................................................ 363
Conclusions and Policy Changes .......................................................... 366
References ................................................................................................. 368
12. What Can We Expect from Universal Primary Education? ............ 371
Simon Appleton
Access to Education Prior to the UPE Initiative ................................. 373
Returns to Education: Productivity and Labor Allocation Effects ... 378
Effects of UPE on School Quality .......................................................... 395
Summary and Conclusions .................................................................... 400
Annex 12.1. Models ................................................................................. 401
References ................................................................................................. 402
13. Combating Illness .................................................................................. 407

Paul Hutchinson
Health Policy and Access to Services ................................................... 409
Burden of Disease ................................................................................... 414
Demand for Curative and Preventive Services .................................. 423
Conclusions and the Way Forward ...................................................... 430
Annex 13.1. Data and Estimation Results ............................................ 433
References ................................................................................................. 444
Part V. Sustainability and Lessons ............................................ 451

14. Beyond Recovery .................................................................................... 453
References ................................................................................................. 460
Appendixes
A. Household Surveys ......................................................................... 463
B. The Uganda Enterprise Survey ...................................................... 467
References ......................................................................................... 473
List of Tables, Figures, and Boxes ................................................................. 475
Index ................................................................................................................... 481

Acknowledgments
Much of the credit for inspiring this book must go to the Ugandan economic
team led by Emmanuel Tumusiime-Mutebile, permanent secretary and sec-
retary to the Treasury, which has made a tremendous effort to turn around
the Ugandan economy since the mid-1980s. The Bureau of Statistics, the Pri-
vate Sector Foundation, and the Uganda Manufacturers Association’s Infor-
mation and Consultancy Service were instrumental in obtaining the
microeconomic data on households and firms used in most of the chapters of
this book. For their encouragement and support to the project we are grate-
ful to James Adams and Shantayanan Devarajan at the World Bank and Peter
Miovic and Joseph Stiglitz.
Drafts of the chapters were presented and discussed at a conference on the
Comprehensive Development Framework in October 1999 in Kampala. We
would like to thank participants for the stimulating and open discussion, and
the World Bank Institute for financial and other support for the conference.
The governments of Austria, Japan, Sweden, and the United Kingdom
have supported parts of the survey work and analysis contained in this book.
Financial support was also received from the Bank’s Poverty Reduction and
Economic Management network in the form of a PREM fellowship.
We would like to acknowledge the World Bank’s Editorial Committee
and four anonymous referees for comments on the manuscript.
Finally, special thanks go to the World Bank publications team and to
Hedy Sladovich who worked diligently and with good humor to bring this
book to its final form.
ix
Contributors
Simon Appleton Lecturer, University of Nottingham; Research

Associate, Centre for the Study of African Econo-
mies, University of Oxford, United Kingdom
Duanjie Chen Associate Director, International Tax Program,

Institute for International Business, University of
Toronto, Canada
Paul Collier Director, Development Research Group, World

Bank, Washington, D.C.
Klaus Deininger Senior Economist, Development Research Group,

World Bank, Washington, D.C.
Bernard Gauthier Professor, Institut d’Économie Appliquée, École

des Hautes Études Commerciales, Montréal,
Canada
Mark Henstridge Economist, African Department, International

Monetary Fund, Washington, D.C.
Paul Hutchinson Researcher, Economics Department, University of

North Carolina, Chapel Hill
Louis Kasekende Deputy Governor, Bank of Uganda, Kampala
xi
xii Contributors
Donald Larson Senior Economist, Development Research Group,

John Matovu Economist, IMF Institute, International Monetary

Fund, Washington, D.C.
John Okidi Senior Research Fellow, Economic Policy Research

Centre, Kampala, Uganda
Ritva Reinikka Research Manager, Development Research

Group, World Bank, Washington, D.C.
Jakob Svensson Assistant Professor, Institute for International

Economic Studies, Stockholm University, Sweden;
Senior Economist, Development Research Group,
Foreword
The economic reforms implemented in Uganda under the leadership of Presi-

dent Museveni and the economic recovery that these reforms have gener-
ated have justifiably attracted a great deal of attention among development
practitioners and academics around the world. Uganda is rightly regarded
as a pioneer of macroeconomic stabilization and structural adjustment in Sub-
Saharan Africa for two reasons: first, because of the extent and consistency of
its economic reform program, especially in the areas of fiscal policy, exchange
rate reforms, trade policy, and the use of debt relief to enhance public expen-
diture on basic social services; and second, because of the reform program’s
success in restoring macroeconomic stability, boosting the economic growth
rate, and reducing poverty.
The reform program followed a prolonged period of economic decline
and civil strife that devastated human and physical capital and destroyed
the economy’s formal sectors, not least because this period witnessed signifi-
cant erosion of much of the institutional framework that is required to sup-
port transactions in a modern economy. Sadly, too many countries have en-
tered the new millennium suffering from a collapse of the economy, of state
capacities, of social capital, and of law and order similar to that which af-
flicted Uganda in the 1970s and 1980s.
Understanding what Uganda has achieved and the strengths and weak-
nesses of its economic reform program is especially important. Exploring the
challenges that the country faces as it attempts to sustain its recovery by
raising private investment levels and improving human resource capacities
is also important. This volume is unique in providing such a comprehensive
analysis of policy reform in a Sub-Saharan African country and the lessons
that can be learned from this analysis for future policy reforms, both in Uganda
and in other countries. The volume will have played an invaluable role if it
xiii
xiv Foreword
brings these lessons to a wide audience and can stimulate debate among
This book consists of a series of studies written by a range of specialists,
all with considerable expertise in their respective fields, that analyze the re-
sponses of private sector agents—households, farms, and firms—and of the
government itself, to the macroeconomic and structural reforms implemented
since the late 1980s in a society recovering from a traumatic civil conflict. The
importance of this line of enquiry cannot be underestimated, because the
success or failure of market-oriented reforms depends crucially on just how
private sector agents are able to respond to the incentives and opportunities
created by the reforms. In this context, the consistency of government policy
over time has become an invaluable national asset. Supporters of market-
oriented reforms argue that they can stimulate increased production and in-
vestment and a more efficient allocation of resources that, over time, will
boost incomes, enhance welfare, and reduce poverty. By contrast, critics of
market-oriented reforms argue that market imperfections and structural or
institutional constraints prevent a positive response from private sector agents.
Resolving these contentious issues requires detailed empirical analysis of the
type presented in this volume.
The analysis in this book draws on a wealth of quantitative data derived
from a series of household surveys and from surveys of firms conducted in
the 1990s and more recently in 1999/2000. The household surveys, conducted
at intervals between 1992 and 1997, permit analysis of the evolution of in-
come, expenditures, and poverty during this period. The impact of reforms
on rural factor markets, on crop and livestock production decisions, and on
firms’ investment decisions are also among the issues researched in this vol-
ume. It is the solid quantitative database on which so much of the empirical
analysis is based that makes this volume so important: few other studies of
structural adjustment reforms have drawn on such a comprehensive data-
base that has been compiled using state-of-the-art data collection techniques
in developing countries. Unfortunately, rigorous empirical analysis of reforms
in Sub-Saharan Africa has often been impeded by a lack of hard data, a defi-
ciency that this volume helps to rectify.
While this book praises Uganda’s achievements where warranted, it pro-
vides an objective assessment of the reforms and does not shy away from
identifying areas where policy mistakes were made, for example, where
implementing reforms earlier might have generated higher rates of return
and alleviated bottlenecks to private sector production. It points out where
major weaknesses still exist, notably, the corruption in the public sector, which
raises the cost of doing business in Uganda and undermines the quality of
public services, the still poor enforcement of contracts, and the deficiencies
in the physical infrastructure. While reforms created economic opportuni-
ties that led to reductions in poverty among most groups of poor house-
holds, a notable exception is households with nonworking heads, which
demonstrates the need for more effective transfer mechanisms to support
Foreword xv
vulnerable households. The objectivity and clarity of the findings in this

volume provide a valuable service to those in Uganda who are striving to
deepen the reform program and to move ahead to tackle the more difficult
institutional reforms that are needed to reduce the cost of doing business in
Uganda and to improve the incentives for saving, investment, and trade.
As someone who has been closely involved in designing and imple-
menting economic reforms in Uganda for more than a decade, I believe
that these reforms deserve the type of comprehensive evaluation, based on
a rigorous analysis of quantitative data, that this volume provides. I hope
that it will enable the lessons that can be learned from our efforts to imple-
ment reforms in Uganda to be disseminated to a wider audience and that
these lessons will be of benefit to others in the developing world who are
working to reform their economies.
Emmanuel Tumusiime-Mutebile
Permanent Secretary/Secretary to the Treasury
Ministry of Finance, Planning, and Economic Development, Uganda
Map of Uganda
1
Introduction
Uganda’s emergence over the past 15 years from economic decline, conflict,
and repressive government to macroeconomic stability, high growth, and
considerable political freedom represents a major turnaround in Africa. Af-
ter the tyranny in the 1970s under Idi Amin and the less notorious, but no
less destructive, regime of Milton Obote during the first half of the 1980s,
Uganda has been undergoing a major transformation since Yoweri Museveni’s
government came to power in 1986 (Bigsten and Kayizzi-Mugerwa 1999;
Hansen and Twaddle 1998). What makes Uganda’s postconflict recovery
particularly interesting is that it coincides with one of the most ambitious
programs of economic liberalization on the African continent. How far has
Uganda progressed on its road to recovery? What are the lessons learned
from liberalization in a postconflict economy? Can the country sustain its
success to date? This book sets out to answer these questions and in doing so
brings the Ugandan experience to a wider audience.
The overarching themes of this book are postconflict recovery and economic
liberalization. In addition, the book discusses at length the many issues
policymakers must consider when they try to guide a country out of a tragic
past. The book also attempts to highlight the complexity of interconnections
and the tradeoffs involved. To do this it analyzes the responses of a wide range
of actors in the economy, namely, households, firms, and the government.
This book presents the findings from a large number of mostly
microeconomic studies on the Ugandan experience of postconflict recovery
and economic liberalization. The rich empirical evidence helps construct a
clear picture of these twin processes and their outcomes. The individual stud-
ies take the most recent thinking, theory, and analytical techniques in a wide
range of areas and apply them all to one country. In effect, Uganda serves as
a laboratory illustrating both the strengths and weaknesses of the theory and
techniques and the extent to which they are useful for policy analysis.
1
2 Paul Collier and Ritva Reinikka
Uganda’s experience provides several interesting lessons. First, the wealth

of information on household and firm responses to economic reforms and
government interventions can help policymakers both in Uganda and other
postconflict and low-income countries design more effective policies in sup-
port of faster economic growth and poverty reduction. Many African coun-
tries now embroiled in conflict and war, such as Angola, the Democratic Re-
public of Congo, Liberia, and Sierra Leone, will find lessons from Uganda
invaluable once they embark on their postconflict recovery. Second, the
Uganda case demonstrates that good policies and strong leadership can bring
about transformation and progress against all odds, including long-lasting
internal conflict, instability in neighboring countries, and geography domi-
nated by a tropical climate and no direct access to the sea (Sachs and Warner
1995, 1997). If Uganda can achieve high growth rates over a long period of
time, why not the other low-income countries with more favorable endow-
ments? Third, such initiatives as universal primary education and making
use of openness and information to combat the HIV/AIDS pandemic and
curtail the leakage of public funds also offer useful lessons more generally.
We argue that Uganda during the 1990s demonstrates the astonishing
efficacy of three elementary aspects of government behavior. First, the gov-
ernment provided a reasonable level of internal peace where previously large-
scale violence had existed. Second, it rescinded predatory taxation. Most
notably, the government removed massive implicit taxation on exports by
liberalizing the foreign exchange rate and coffee marketing. Third, by ensur-
ing fiscal discipline, the government provided a currency whose value did
not dramatically erode. While these three achievements may sound modest,
attaining them was not easy.
Part I explores these three aspects of government behavior from a macro-
economic perspective, that is, it analyzes the characteristics of and tradeoffs
in Uganda’s postconflict reconstruction and economic reforms, including
macroeconomic and fiscal management that has ensured a stable macro
economy since 1992. Hence, part I sets the stage for the rest of the book, which
mainly addresses microeconomic and institutional responses to these reforms,
and constraints that remain.
At the household level, the restoration of internal peace allowed a gradual
return from subsistence production to market-based activities. Removing im-
plicit taxation on exports, in turn, made recovery in export crops possible, par-
ticularly for coffee and cotton, but also allowed for the emergence of nontradi-
tional exports. The stable currency and orderly macroeconomic management
of the 1994–95 coffee boom allowed coffee-growing households to transform a
temporary income windfall—the biggest in Uganda in the 1990s—into produc-
tive investment. At the onset of the boom, financial assets were accumulated
temporarily, which, over time, were transformed into physical assets.
Part II focuses on household responses, first, by looking at changes in
households’ economic welfare and inequality in the 1990s. Uganda’s good
macroeconomic performance and high growth rates over the past decade
Introduction 3
pose intriguing questions for policymakers and researchers alike. Has pov-
erty declined as a result? Has economic growth increased inequality? Which
groups have benefited? Have others been left out? Following the poverty
analysis, part II explores households’ responses to liberalization and new
economic incentives as producers, given that households are the principal
productive unit in the Ugandan economy. Most people, and almost all the
poorest, depend on smallholder agriculture for their livelihoods. The scope
for sustainable poverty reduction is therefore intimately linked to increases
in market participation, agricultural productivity, and nonfarm employment.
At the macroeconomic level, reliance on subsistence production in agricul-
ture increased considerably during the economic decline in 1971–85, from 21
percent of gross domestic product (GDP) in 1971 to 36 percent of GDP in
1986. Only in recent years has the share of subsistence agriculture returned
to its preconflict level. Part II explores the corresponding changes in crop
markets and market participation at the microeconomic level.
This relatively comprehensive analysis of household responses and con-
straints is possible—for the first time—thanks to the data from five nation-
ally representative household and community surveys that the Ugandan
Bureau of Statistics has made available for 1992/93–1997/98 (see appendix
A.) In addition, preliminary data from the second baseline survey carried
out in 1999/2000 were made available. The latter focuses on agriculture and
other productive activities more than the previous surveys. All chapters in
part II are based on these household survey data.
For enterprises, internal peace was a necessary condition for increasing
capacity utilization and for initiating new investments. Removal of implicit
export taxation, in turn, changed the incentive regime in favor of exportable
goods, while a stable currency and a stable macro economy provided the
necessary conditions—similar to restoration of peace—for firms to resume
production, investment, and export activities.
Part III is devoted to firms. At present, the firm sector in Uganda is still
very small. In 1996, only about 500 firms had more than 20 employees. This
sector has not yet fully recovered from the double blow of deportation of the
Asian business community by Idi Amin in 1972 and the subsequent period
of economic and social decline that, among other things, led to a retreat from
transaction-intensive activities into subsistence production. The 1971–85 pe-
riod was characterized by a shrinking enterprise sector, dissaving, and
decumulation of assets. Yet, the enterprise sector plays a critical role in the
country’s development as households rarely achieve the economies of scale
required to sustain growth. To assess Uganda’s economic prospects, it is im-
portant to know the extent to which firms are investing in productive assets
and increasing their productivity and exports, and what constraints remain,
both for domestic firms and foreign investors.
Analysis of the enterprise sector is based on surveys of domestic and
foreign-owned firms. The main source of data is an enterprise survey imple-
mented by the World Bank and the Ugandan Private Sector Foundation in
1998 in which quantitative and qualitative data on manufacturing,

agroprocessing, commercial farming, tourism, and construction firms were
collected for 1995–97. Because similar data exist for several African coun-
tries, it is possible to compare the performance of Ugandan firms with that of
their counterparts elsewhere in Africa. Apart from the 1998 enterprise sur-
vey, qualitative data are also available from two surveys of foreign investors
in 1994 and 1999 and a survey of domestic firms in 1994 (see appendix B.)
Finally, part IV examines the government’s role in Uganda’s recovery,
first focusing on how the government was able to become less predatory,
with particular emphasis on how it was able to restructure the earlier preda-
tory tax regime. In other words, this part of the book explores the degree to
which the government was able to shift from export taxation to other rev-
enue sources and how this restructuring affected households and firms. Cor-
ruption is another form of predatory behavior within the public sector. Al-
though it is not possible to examine changes in corruption over time in the
absence of data, we do examine the costs of corruption today.
Another area of focus with respect to government is public investment,
which is a necessary complement to a strong private response to policy re-
forms. As in many other African countries, macroeconomic and externally-
oriented trade and exchange rate policies have ceased to be the most binding
constraints in Uganda. Instead, domestically-oriented and institutional prob-
lems, notably, poor delivery of public services, are now the most serious ob-
stacles for investment and growth on the one hand, and poverty reduction
on the other hand (Collier and Gunning 1999a,b). Success in macroeconomic
policy has made these institutional constraints blatantly evident. Institutional
reform in Uganda has acquired an added dimension as responsibility for
basic services has been decentralized to local governments (districts) in re-
cent years. Part IV examines the extent to which public sector institutions
have recovered in the past 15 years, recognizing that institutional problems
tend to be harder to correct than policies, which can often be altered by a
stroke of the pen. In particular, it looks at institutional recovery in social ser-
vices using data from schools and health centers. Because high educational
attainment and good health are both intrinsically desirable goals of human
development and investments in households’ human capital, this part then
looks at changes in education and health policy and access to and demand
for these services. The impact of new policy initiatives and economic oppor-
tunities on household behavior related to health and education are exam-
ined, as well as adverse developments, particularly the HIV/AIDS pandemic.
As in the two preceding parts of the book, the analysis in part IV is based
on survey evidence from firms and households, which is complemented with
data from service facilities. Hence, the public sector’s performance is assessed
from the beneficiary’s perspective.
Part V synthesizes the evidence from both macroeconomic and
microeconomic analysis and discusses Uganda’s prospects for sustaining its
achievements in the areas of growth and further poverty reduction. It also
Introduction 5
explores the extent to which the Ugandan experience is applicable to other

low-income and postconflict countries.
The remainder of this chapter summarizes the main issues covered in
each chapter, including its most important findings.
Postconflict Recovery and Macroeconomic Reforms

In chapter 2, Paul Collier and Ritva Reinikka analyze Uganda’s post-1986
performance in light of the past socioeconomic collapse and explore features
of the economic liberalization program that led to a remarkable economic
recovery in the 1990s. This overview chapter provides the setting for more
detailed studies in the rest of the book. First, the chapter quantifies the inher-
itance of social disorder that faced the National Resistance Movement in 1986,
and then assesses the extent to which the society was prone to further con-
flict and how the level and structure of economic activity had been altered
during the conflict. The authors find that by 1999, Ugandan society was con-
siderably safer from internal, large-scale conflict than it had been both at
independence and in 1986. Second, the chapter explores the extent to which
the Ugandan government was successful in meeting the needs of enhanced
security, on the one hand, and economic growth and poverty reduction, on
the other. As the inheritance has implications for economic policy, the chap-
ter examines how the government should have changed economic policy
priorities and the extent to which it recognized them in practice. Third, the
chapter looks at the experience with trade liberalization and privatization
and summarizes macroeconomic evidence on the impact of these reforms on
investment and exports. Finally, it estimates the direct contribution of for-
eign aid to economic growth and poverty reduction, and finds that it is about
30 percent of the realized GDP growth rate per capita and of the fall in the
incidence of poverty. These estimates are probably conservative, as aid has
had an additional positive effect on policy reforms, and thus has also con-
tributed indirectly to Uganda’s overall performance.
In chapter 3, Mark Henstridge and Louis Kasekende review Uganda’s
exchange reforms, stabilization record, and fiscal management. They begin
by analyzing exchange liberalization and subsequent management of a float-
ing exchange rate, and then consider the role of public expenditure manage-
ment in delivering low inflation. They highlight the fact that fiscal policy has
been the paramount instrument in successful macroeconomic management
and describe how the system and institutions have evolved. Within this con-
text, macroeconomic policy in Uganda has faced three tradeoffs. First, a
tradeoff has occurred between short-term fiscal adjustment and monetary
measures. Second, in the face of shocks to expenditures—mainly due to within-
year spending pressures from some parts of the government—a tradeoff has
occurred between the maintenance of the spending allocations and of budget
aggregates. Given that inflation control has been government’s paramount
goal since 1992, aggregate spending levels have been maintained, when
necessary, at the expense of sector allocations. Third, a tradeoff has occurred

between the volume of foreign aid inflows to finance the budget and the im-
pact of foreign aid on the exchange rate. This chapter analyzes the resolution
of these tradeoffs, including the coffee boom of 1994–95, the management of
which is one of Uganda’s macroeconomic challenges—and successes.
Households
In chapter 4, Simon Appleton examines the dynamics of poverty in Uganda
in the 1990s using private household consumption as the measure of pov-
erty. Although consumption is only one dimension of poverty, it is important
in the Ugandan context where major economic reforms have been imple-
mented and the primary objective was to increase household incomes and
consumption. The analysis of five nationally representative household sur-
veys shows an unambiguous picture of rising living standards and a sub-
stantial fall in poverty. Using an absolute poverty line, the chapter finds that
56 percent of Ugandans were poor in 1992, but that this number fell to 44
percent in 1997. Hence, in the five years for which data are available, growth
translated into a 20 percent reduction in poverty. In addition, real consump-
tion per capita has risen for all population deciles, implying a reduction in
poverty regardless of where the poverty line is set. Indeed, living standards
grew most rapidly for the poorer deciles, leading to less inequality. The fall
in poverty was, to a large extent, attributable to coffee-growing households.
The only group (representing about 5 percent of the total number of house-
holds) within which poverty increased was households with a nonworking
(for example, elderly) head. This finding confirms the general impression
that economic recovery has created opportunities that many households were
able to seize, but that transfer mechanisms for targeting the households un-
able to do so are inadequate. While urban living standards have risen faster
than rural ones, an interesting observation is that the rise in rural welfare is
comparable with, and even more consistent than, the rise in urban areas.
In chapter 5, Klaus Deininger and John Okidi review major changes that
have occurred in Uganda’s rural sector between 1992 and 1999. Consistent
with Appleton’s findings of household consumption, these authors show that
in response to liberalization, per capita incomes have grown significantly with-
out deterioration in income distribution. Households that had low incomes in
1992, but had human and physical capital assets, were able to benefit the most
from economic growth. Other changes include the recovery of cotton output
(especially in the northern region), the increased cultivation of nontraditional
crops, and a doubling in livestock ownership. Rural factor markets are now
functioning better than before, as shown by the increased number of land trans-
actions and share of producers with access to credit. Analysis of the determi-
nants of nonfarm enterprise startups illustrates the crucial role of education
and access to financial markets. At the same time, the chapter demonstrates
why many constraints remain. With the exception of cotton, little agricultural
diversification and economic growth has taken place in the north, which is the
Introduction 7
poorest region. In the rest of the country, output remains variable, mainly due
to crop diseases. Differential performance by communities even within the
same region suggests that better access to existing technology could help in-
crease productivity. Despite continued efforts, extension services remain lim-
ited, and only one-third of communities reported having been served by an
extension worker. Land conflicts exist in about half of the communities. Unless
cost-effective ways are developed to implement recently passed land legisla-
tion, these conflicts, together with other tensions, could easily threaten social
stability and rapid development.
In chapter 6, Donald Larson and Klaus Deininger explore the characteris-
tics of crop markets and the extent to which households participate in them.
Price differentials between local and district markets for food crops are found
to be large absolutely and relative to export crops. Because of the large mar-
gins, high transport costs, and uncertainty about crop quality, the marketing
of food crops is riskier than the marketing of export crops. These characteris-
tics encourage households to remain self-sufficient and diversified in their
production. This situation is self-reinforcing, because the lack of specializa-
tion limits the demand for local food crops and the depth of local markets.
This chapter shows that although no indications of widespread market fail-
ure exist and participation in crop markets is increasing, most rural house-
holds continue to be engaged in self-reliant farming, and hence are
unspecialized. Access to infrastructure, telecommunications, and credit help
explain average crop price differences among communities, but their quanti-
tative impact appears to be small. In fact, household-specific characteristics,
such as assets and education, are found to be more important for increased
market participation than community-specific characteristics, such as infra-
structure and access to financial services. Consequently, policies that enable
households to accumulate savings and human and physical capital, thereby
equipping them to handle the additional risks of specialization, are likely to
result in improved crop market performance.
Firms
In chapter 7, Ritva Reinikka and Jakob Svensson use data from the 1998 en-
terprise survey to show that the investment rates (the value of investment
relative to capital stock) of Ugandan firms are not very different from those
in other African countries. Despite major improvements in the policy envi-
ronment in Uganda, the investment rates of Ugandan firms average slightly
more than 10 percent annually, with a median value of just below 1 percent.
Profit rates, however, are considerably lower in Uganda. These results are
consistent with the view that Ugandan firms are more confident in the
economy than their counterparts in other African countries and, for a given
profit rate, Ugandan firms invest more. At the same time, thanks to economic
liberalization, increased competition in Uganda has put pressure on firms to
cut costs. Many of these costs, however, are in the public domain and not
under firms’ control (for example, infrastructure services). Thus, Ugandan
firms have been hindered in their ability to respond to increased competition

by reducing costs, which has adversely affected profits. The chapter shows
that firms, especially small firms, are liquidity constrained in the sense that
they only invest when sufficient internal funds are available. However, given
the level of firms’ profit-to-capital ratios compared with the rest of the world,
it is hard to argue that the liquidity constraint is binding in most cases.
In chapter 8, Bernard Gauthier assesses the impact of trade reforms on
the enterprise sector. The expectation is that firms adopt new technologies
and reorganize operations to compete in the world market and that produc-
tion shifts toward more efficient firms. The chapter looks at enterprise re-
sponses to the new economic incentives and examines the relationship be-
tween export orientation and productivity. A number of productivity measures
are used, such as labor productivity, total unit cost, total factor productivity,
and technical efficiency. The chapter shows that export orientation is a sig-
nificant determinant of firms’ performance, especially as it relates to output
and productivity growth. Although nominal export growth is important, in-
cumbent exporters produce most of the exports, because few new firms are
entering the market. When new firms do so, they concentrate on the regional
market and tend to be smaller. Finally, chapter 8 compares Ugandan export-
ing firms with companies in several other African countries and examines
remaining constraints to exporting.
Government
Uganda began its recovery and liberalization at a low level of government
revenue, merely 5 percent of GDP in 1986, about one half of which was tax on
coffee exports. Indeed, a low level of revenue is characteristic of postconflict
countries. At the same time the needs for public spending on social services
and infrastructure are huge, both to support impoverished households’ efforts
to increase their production, consumption, and welfare and to encourage en-
terprises to invest and diversify. Ugandan policymakers responded by rapidly
increasing domestic revenue and increasing public spending even more; ef-
forts facilitated by foreign aid. Indeed, the rebuilding of the government’s rev-
enue base was instrumental in Uganda’s economic recovery.
In chapter 9, Duanjie Chen, John Matovu, and Ritva Reinikka discuss
the government’s efforts to reduce implicit export taxation. They argue that
the policy of rapidly increasing public revenue presented a tradeoff for the
economic liberalization program. Specifically, they believe this policy ini-
tially curtailed the scope of trade reform. Although the coffee export tax
was abolished early on, tariffs and other import taxes were retained, ini-
tially at a fairly high level, because of the quest for revenue. In recent years
tax policy has emphasized measures to achieve a more efficient and equi-
table tax regime, including reducing import duties and discretionary tax
exemptions, introducing the value added tax, and reforming income tax.
Despite these efforts, the share of tax revenue in GDP seems to have stag-
nated at about 11 percent since 1997–98.
Introduction 9
The chapter also examines the resulting incidence of tax policies on

households and firms. Household survey data are used to assess the distri-
butional impact of the tax reforms, which are generally found to be benign
for the poor. Firm-level data are used to calculate the marginal effective tax
rates for several factors of production and for the productive sectors for
Uganda and its neighbors, Kenya and Tanzania. The analysis shows that
although Uganda’s public revenue is lower as a share of GDP, its manufac-
turing and tourism enterprises face a higher tax burden than their counter-
parts in the neighboring countries. This clearly limits the scope for raising
business tax rates.
The problem of corruption has recently gained prominence in public de-
bate in Uganda and elsewhere. The government has responded by putting
forward and beginning to implement an anticorruption action plan. An im-
portant part of the fight against pervasive corruption involves collecting and
disseminating systematic data on the problem. Until recently, it was consid-
ered impossible to measure corruption. However, experience both from
Uganda and elsewhere shows that with appropriate survey methods and
interview techniques, household heads and firm managers are willing to dis-
cuss corruption with remarkable candor.
In chapter 10, Jakob Svensson exploits quantitative data from the 1998
enterprise survey, showing that firms typically must pay bribes when deal-
ing with public officials whose actions directly affect the firms’ business op-
erations. Such dealings cannot easily be avoided when, for example, export-
ing, importing, or requiring public infrastructure services. Moreover, the
demanded bribes are not fixed sums for given public services, but depend
on a firm’s “ability” to pay. The chapter shows that the adverse effect of brib-
ery on firm growth is more than triple that of corporate taxation. To sustain
high growth rates in the future, the fight against corruption must intensify.
In chapter 11, Ritva Reinikka demonstrates that even in the absence of
reliable financial management systems, disseminating information on bud-
get allocations and on the use of funds through newspapers and other popu-
lar information sources enables people to hold civil servants accountable for
results. Increasing public access to information has reduced inefficiency and
corruption in Uganda. When primary grade enrollments recorded in official
statistics did not seem to improve despite substantial increases in budget
allocations for education, schools were surveyed to examine public spend-
ing on primary education. The survey found that budget allocations matter
little when institutions are weak: at most, 20 percent of the intended nonsalary
public spending on primary education reached schools during the period
under review. In response, the government has taken steps to improve per-
formance by increasing the flow of information within the system. A major
breakthrough occurred when newspapers and the radio regularly announced
the transfer of public funds to districts, and posted this information on edu-
cation spending at schools. A follow-up survey in 1999 shows that as a result,
input flow to the schools has improved dramatically since 1995. Schools now
receive more than 90 percent of the nonwage public funding released by the
central government. By contrast, health sector improvements have been much

slower and more difficult to document in the absence of facility-level records
on inputs and outputs.
In education, a major development was the 1997 universal primary educa-
tion initiative, which sparked a strong reaction from households. In chapter
12, Simon Appleton demonstrates the positive equity effects of this initiative
and shows how girls, children from poor households, those with poorly edu-
cated parents, and those from poorer regions benefited. Furthermore, the com-
mon finding from cross-sectional analysis that school fees have little or no im-
pact on enrollment was turned on its head in Uganda when removing these
fees resulted in a huge increase in primary school enrollment. Efficiency gains
are also found to be fairly significant, and education has similar proportional
productive benefits across different economic activities, including the effect of
education in reallocating labor. Ultimately, the efficiency effects of the univer-
sal primary education initiative will depend on how the initiative affects the
quality of education. As can be expected, preliminary research reported in this
chapter shows academic performance declining because of very large class
sizes. Addressing the quality of education will be one of the greatest challenges
for Ugandan policymakers in the next few years.
In health, important questions are whether health outcomes at the house-
hold level have improved with higher incomes, and how access to and de-
mand for health services has changed. In chapter 13, Paul Hutchinson finds
that overall, health outcomes seem to have moderately improved, except for
life expectancy, which has worsened because of the HIV/AIDS pandemic. The
impact of other major health problems in Uganda, such as malaria, childhood
malnutrition, and poor reproductive health, are also discussed. The chapter
examines the demand for health care, including the relative importance of such
factors as proximity, price, and quality of service, and reviews key issues in the
supply of health services. The chapter finds that poor quality of service in the
public sector has resulted in low utilization rates in its facilities.
Sustainability and Lessons

Chapter 14 by Paul Collier and Ritva Reinikka synthesizes the finding of the
studies presented in the volume and, in light of these findings, assesses pros-
pects for sustaining the remarkable performance of the 1990s. The challenge
to which the Ugandan government rose so successfully during the 1990s was
that of recovery; in contrast, today it faces quite a different set of challenges.
The achieved agenda has been peace and prices, while investment and be-
havioral change might characterize today’s agenda. Indeed, the authors of
this chapter argue that the Ugandan government has already embarked on
an agenda beyond recovery. Both public and private investment is recover-
ing, and investor risk ratings have improved considerably. The government
has also begun to embrace the difficult task of inducing behavioral change,
Introduction 11
by initiating active policies to curtail corruption. This agenda will undoubt-

edly be difficult and time-consuming to accomplish.
As a landlocked economy, much of Uganda’s trade over the long run is
likely to be regional. Uganda is also potentially competitive in the interna-
tional export markets that warrant air freighting. Regional integration is
unlikely to offer Uganda many opportunities for manufacturing, but it is
likely to provide opportunities in food production and service industries.
Hence, the agenda envisioned for sectoral growth in the future includes
intensification of agriculture, service exports to the region, and new agro-
based international exports. These sectors all need improvements in insti-
tutions and infrastructure.
The authors conclude that the National Resistance Movement govern-
ment inherited a society in which improvements in service delivery would
inevitably take a long time, while rapid poverty reduction was greatly facili-
tated by ending predatory taxation, providing a stable currency, and achiev-
ing peace. In the process of achieving these limited but important objectives,
the government has acquired the competence, the mandate, and the confi-
dence to tackle the more difficult tasks it now faces.
References
The word “processed” describes informally reproduced works that may not
be commonly available through library systems.
Bigsten, Arne, and Steve Kayizzi-Mugerwa. 1999. Crisis, Adjustment and
Growth in Uganda. A Study of Adaptation in an African Economy. Lon-
don: MacMillan Press.
Collier, Paul, and Jan Willem Gunning. 1999a. “Explaining African Economic
Performance.” Journal of Economic Literature 37(March): 64–111.
_____. 1999b. “Why Has Africa Grown Slowly?” Journal of Economic Perspec-
tives 13(3): 3–22.
Hansen, Holger Bernt, and Michael Twaddle, eds. 1998. Developing Uganda.
Oxford, U.K.: James Currey; Athens, Ohio: Ohio University Press.
Sachs, Jeffrey, and Andrew M. Warner. 1995. “Natural Resources and Eco-
nomic Growth.” Development Discussion Paper no. 517a. Harvard
Institute for International Development, Cambridge, Massachusetts.
_____. 1997. “Sources of Slow Growth in African Economies.” Journal of Afri-
can Economies 6(October): 335–76.
Part I
Postconflict Recovery and

Macroeconomic Reforms
2
Reconstruction and Liberalization:

An Overview
Uganda’s economic performance has been among the most successful in the
world during the past decade. Rapid growth is reducing poverty, prices are
stable, and investor confidence has increased more than anywhere else in Af-
rica. As Uganda exemplifies successful African economic liberalization, it is
important to understand the reform process. Uganda’s current success can only
be understood in the context of its past. During 1971–85, both the Ugandan
economy and Ugandan society collapsed. By 1986, when the National Resis-
tance Movement (NRM) captured Kampala and formed a government, Uganda
had suffered the predations of Idi Amin and three other transient presidents,
as well as a civil war, the mass emigration of skilled workers, and mass mur-
der. Current success thus represents a recovery from conflict. Indeed, Uganda
is the main model of successful postconflict recovery in Africa.
Uganda’s collapse made attaining rapid growth easier in some respects,
and more difficult in others. It was easier because resources were available
to draw upon; for example, there was scope to induce the repatriation of
human and financial capital. It was more difficult because the social and
institutional collapse left a persistent inheritance, such as low trust and
high opportunism. This reality makes Uganda’s success more complex, but
also potentially even more illuminating than if it were a straightforward
story of economic liberalization. Most of Africa’s currently problematic
economies will need to replicate Uganda’s transition to rapid growth from
an inheritance of social decay. The objective of this chapter—and of the
entire book—is thus to understand the twin processes of liberalization and
reconstruction and how they relate to each other. The need for social recon-
struction changed the liberalization program both by constraining it and
by introducing new priorities. The need for liberalization similarly changed
the reconstruction program.
15
This overview chapter analyzes Uganda’s performance after 1986 from

the perspective of the inheritance of socioeconomic collapse. It addresses the
following questions: What is distinctive about an economy newly emerged
from internal conflict? How successful was the government in meeting the
dual needs of enhanced security and poverty reduction? What were the im-
plications for economic policy? To answer these questions the chapter first
quantifies the inheritance of social disorder that the NRM government faced
in 1986. It assesses how prone the society was to further conflict and the
extent to which the level and structure of economic activity had been altered.
Second, the chapter focuses on the implications of the past conflict for the
government’s security policy and explains how the government had little
choice but to give priority to making Uganda a safer society. It then examines
how Uganda became safer, and to what extent the NRM’s policy succeeded
in reducing the risk of conflict. Third, the chapter looks at how the inherit-
ance should have changed the approach to economic liberalization and the
extent to which this was recognized in practice. Fourth, the chapter high-
lights key features of economic liberalization and the structural reform pro-
gram, including macrolevel outcomes in exports and investment. Finally, the
chapter discusses the role of foreign aid in Uganda’s recovery.
The Inheritance of Disorder

In 1972 President Idi Amin declared economic war against the large and com-
mercially dominant Asian community in Uganda. This action marked the
beginning of an economic collapse and of escalating political and social dis-
order. By 1979, when Amin was overthrown, as many as 500,000 Ugandans
had died as a result of the regime and there had been two insurgency at-
tempts by exiles. Amin’s overthrow threw the country into a period of ex-
treme instability and mass murder. By 1986, the year that marks the return of
political order, some 7 percent of the population had been displaced. Since
1971, per capita income had declined by 40 percent, and the composition of
economic activity had changed radically.
The causes of political breakdown in Uganda were various. It is impor-
tant to consider them to distinguish between factors that made Uganda
intrinsically prone to conflict and require attention during the postconflict
phase and the ones that were idiosyncratic to the episode itself. In particu-
lar, was Uganda simply unfortunate in being led by particular personali-
ties, notably Idi Amin, or were the personalities to some extent merely the
instruments of deeper social forces? Naturally, definitive answers to such
questions are unattainable, but recent analysis of the causes of civil conflict
may shed some light. Globally, six factors have been shown to increase the
probability of conflict (Collier and Hoeffler 2000b). Low per capita income,
slow per capita economic growth, rapid population growth, high depen-
dence on primary commodity exports, and a geographically dispersed popu-
lation are all risk factors. In addition, the structure of the society matters.
Reconstruction and Liberalization: An Overview 17
Societies with a homogenous ethnic and religious makeup and societies

where one ethnic group constitutes an absolute majority of the population—
known as ethnic dominance—are more at risk of conflict than others. Table
2.1 applies the probit regression, which Collier and Hoeffler (2000b) find
best explains the risk that a civil war will occur during the subsequent five
years, to estimate the risks of civil war in Uganda as of 1970.
In 1970, prior to Amin’s coup, Uganda was predicted to have had a mod-
erately high risk of conflict: a 1-in-10 chance during the ensuing five years.
The country’s main risk factor was its high dependence on primary com-
modity exports, because they are easy targets for rebel forces motivated by
greed or grievance. A second risk factor was the slow growth of opportuni-
ties relative to the rapid population growth experienced during the previous
five years. Although incomes were relatively high by African standards, the
slow growth of the economy and the rapid population growth limited eco-
nomic opportunities for youths newly entering the labor force. Thus, the struc-
ture of the economy made Uganda inherently risk-prone, but the structure of
society was quite favorable. Uganda had a high level of social fractionaliza-
tion, which tends to make societies safer, because no one group can domi-
nate the political process. Ugandan politics reflected the country’s social di-
visions. Two were perhaps most prominent: the division between the Baganda
and the non-Baganda, and the division between the predominantly Moslem
and poorer north and the predominantly Christian, more commercialized
south. However, the presence of many other ethnic and religious groups
helped mitigate the situation. Many people assume that socially fractional-
ized societies are more at risk of civil war, because different social groups
usually dislike each other and loudly express their grievances. Yet empirical
evidence shows that fractionalization is a powerful source of safety and that
dislike does not translate into combat.1
Despite a 1-in-10 risk of civil war in each five-year period, Uganda was
unfortunate to collapse into civil war relatively soon after independence. Its
misfortunes included the repression of political rights under President Obote
and having someone like Idi Amin as head of the army.
Social conflict and political breakdown have various impacts that affect
both the level and composition of economic activity (Collier 1999), namely:
• Conflict destroys assets. Both the government and rebels become
predatory. For example, many households lost livestock to soldiers.
1. Note this qualification to Uganda’s generally benign social composition. Al-

though no ethnic group constituted a majority in society, one group—the Baganda—
was much larger than any other group, representing around 30 percent of the popu-
lation. On average it is only when one group accounts for more than around 45 percent
of the population that the risk of conflict is significantly increased. However, fear of
Baganda dominance may help explain the collapse of political rights as President
Obote used the army to crush political opposition.
Table 2.1. The Risk of Civil War in the Ensuing Five Years, 1970, 1986, and 1999
Factors determining risk Contribution to risk

Factor Value in 1970 Value in 1986 Value in 1999 Coefficient 1970 1986 1999
Per capita incomea 842.029 488.3768 724.1449 –1.0074 –6.785659 –6.236901 –6.63372
Growth – population growthb –10.85138 –7.572243 –4.13839 –0.103 1.1176921 0.779941 0.4262541
Primary exportsc 0.126 0.109681 0.051785 22.9831 2.8958667 2.5208056 1.901878
Primary exports squared –39.2932 –0.623817 –0.472693 –0.105373
Population 9,812,000 14,460,240 21,445,515 0.6248 1.01E+01 1.03E+01 1.05E+01
Fractionalizationd 6,210 5,940 5,940 –0.00036 –2.2356 –2.1384 –2.1384
Ethnic dominancee 0 0 0 0.6225 0 0 0
Geographic concentrationf 0.508 0.508 0.519 –1.8505 –0.940054 –0.940054 –0.96041
Time since previous conflictg 42 1 139 –0.0041 –0.1722 –0.0041 –0.5699
Constant –5.4823 –5.4823 –5.4823 –5.4823
18
Totalh –2.167344 –1.672678 –3.726396
Risk of conflict (percent)i 10.3 15.8 2.4
Note: The contribution to risk measures the product of the value of the variable and its coefficient.
a. Per capita income is at purchasing power parity (PPP) prices. In the regression it is entered as a natural logarithm.
b. Growth – population growth follows Collier and Hoeffler (2000b) in taking the average rate of per capita economic growth during the five preceding
years, minus three times the rate of population growth, these weights being empirically derived in their paper.
c. Primary exports are the share in gross domestic product.
d. Fractionalization is the square of the product of ethnolinguistic and religious fractionalization. On a scale of 0–100, measuring the probability that two
randomly drawn people will be from different groups, ethnic fractionalization in Uganda is estimated for the entire period at 90, and religious fractionalization
at 68 in 1965 and 64 in 1985.
e. The zero value on ethnic dominance implies that no single ethnic group constitutes as much as 45 percent of the population.
f. Geographic concentration measures the spatial dispersion of the population over a 20 square kilometer grid of the country.
g. Time since the previous conflict is measured in months. The arrival of the NRM in Kampala is taken as the end of the civil war, although conflict
continued at a lower level for some months.
h. The total row shows the value of [ln(p/(1 – p)], where p is the probability of civil war in the ensuing five years.
i. The risk of conflict row shows the value of p.
Source: Collier and Hoeffler (2000b).
• Transactions become disrupted as the means to enforce contracts start

to break down. When the political leadership becomes opportunistic,
the legal system and the civil service also become opportunistic. Busi-
nesses respond to this situation by retreating into a hard core of known
relationships, not daring to risk new clients. For example, the major
banks in Uganda were extremely reluctant to take on new business
customers. Thus transactions became both more costly and less com-
petitive, fostering the emergence of informal cartels.
• Government expenditure is diverted from its economically produc-
tive functions and becomes focused on the objectives of predation and
defense. A graphic example of this in Uganda was the contraction of
the police force and the rise of the army.
• Because conflict causes economic decline, households, firms, and gov-
ernment have strong incentives to dissave. As incomes are perceived
as temporarily low, people will try to maintain consumption.
• Households shift their assets, including human capital, out of the coun-
try, to environments where they are both safer and more productive.
The process of shifting assets may itself be costly. For example, con-
sider the problem of shifting a building, a coffee tree, or an installed
machine out of Uganda. In one sense, these items are all immovable.
However, to remain productive they all need to be maintained. Hence,
the owner can gradually liquidate the asset by cutting maintenance
expenditures. If the money saved on maintenance is used to purchase
illegal foreign exchange which is held in a foreign bank, the immov-
able asset is gradually transformed into flight capital. By 1986, 60 per-
cent of Uganda’s private wealth was held abroad
Conflict reduces the level of economic activity through two routes. De-
struction, dissaving, and flight diminish the stock of physical and human
capital. In addition, productivity is reduced by disruption and expenditure
diversion. As shown in table 2.2, per capita gross domestic product (GDP)
declined by over 40 percent between 1971 and 1986. This severe decline was
larger than is typical for periods of domestic conflict. Collier (1999) estimates
that on average such conflicts reduce growth by 2.2 percent per year relative
to counterfactual growth. The Ugandan economy declined in absolute terms
by 1 percent per year, and given rapid population growth, counterfactual
growth could hardly have been less than 2 to 3 percent. Hence, either the
Ugandan economy was atypically vulnerable to social disorder, or the disor-
der was severe even by the normal standards of civil war. Because subsis-
tence agriculture is relatively invulnerable to disorder and Uganda had a
large subsistence sector even before the outbreak of conflict, its economy
should not have been abnormally vulnerable to disorder. Thus the more likely
interpretation is that Uganda suffered an unusually severe social collapse.
The decline in aggregate expenditure was even more severe than the decline
in output. Aid inflows ceased, and the government was manifestly unable to
Table 2.2. The Level and Composition of Economic Activity, Selected

Years
Economic activity 1971 1986 1994 1997 1999

GDP per capita (index: 1971 = 100) 100 58 69 80 86
Volume of coffee exports
(thousands of tons) 191 141 152 265 216
War-vulnerable activities (percentage
share of GDP at 1991 prices)
Activities intensive in assets and
transactions (manufacturing) 8.8 4.4 6.0 8.6 9.6
Transaction-providing activities
(transport and commerce) 21.1 16.1 17.2 17.7 18.2
Asset-providing activities
(construction) 12.5 3.5 5.5 7.6 7.9
Total 42.5 24.0 28.7 33.9 35.7
War-invulnerable activities (percentage
share of GDP at 1991 prices)
Subsistence activities excluding
livestock and construction 20.5 36.0 26.9 21.0 20.3
Unassigned activities 37.0 40.0 44.4 45.1 44.0
Note: Data are for fiscal years.
Source: Collier (1999); Republic of Uganda (various years); Bank of Uganda data.
borrow commercially. As foreign flows to the government ceased, an illegal

outflow of private capital started.
The composition of GDP is altered by social disorder because activities
are affected differentially. As the costs of transactions rise and capital stock
declines, activities that are intensive in transactions and in capital, such as
manufacturing, decline relative to those that have the opposite characteris-
tics, such as subsistence agriculture. Similarly, the sectors that supply trans-
action services, such as transport and finance, and those that supply capital,
such as construction, decline because the demand for their output falls. Table
2.2 classifies the components of GDP according to these principles into three
groups: (a) those likely to be differentially vulnerable to social disorder, (b)
those likely to be differentially immune, and (c) those for which, a priori,
there is no reason to expect a differential effect.
As table 2.2 shows, a remarkable change in the composition of activity took
place between 1971 and 1986. Subsistence activities (excluding livestock and
construction) increased from 21 to 36 percent of the economy. In contrast, the
shares of manufacturing and the other vulnerable sectors virtually halved.
To summarize, the economy inherited by the NRM in 1986 was both much
poorer than that of 1971, and it had retreated into subsistence activities. These
realities had implications for postconflict recovery.
In addition to the economic effects, a civil war leaves a legacy that consid-
erably increases the risk of further conflict. Empirically, half the societies that
experience a civil war sustain the subsequent peace for less than a decade.
Collier and Hoeffler (2000b) find that a conflict typically more than doubles
the risk of subsequent conflict, a risk that gradually fades with sustained
peace. Conflict might increase the risk of additional conflict for several rea-
sons. The society is likely to have become polarized, with smaller groups
agglomerating into two sides, creating a situation somewhat analogous to
ethnic dominance. Norms will have changed, and violence becomes an ac-
cepted way to resolve political conflict. Moreover, fears that opponents will
resort to violence may make it rational to use violence preemptively. The
society will have accumulated both human and physical capital, which can
only be used in conflict, that is, many people are trained in violence and have
guns. Finally, rival military organizations will have been built, and the se-
nior people within these organizations have little incentive to dismantle them,
because some people profit from war.
Given these changes, the Collier-Hoeffler model estimates that by 1986
the risk of conflict had increased to around 16 percent over the next five years
(see table 2.1.) At this level of risk, Uganda was evidently facing a dangerous
future. A major factor accounting for this increase in risk was the cumulative
decline in the level of income. Poorer societies are much more prone than
others to conflict, partly because the state is incapacitated by a lack of rev-
enue. In low-income societies, the state is penalized twice: most obviously
by a small tax base, but also because tax revenue is a very small share of
income. By 1986, the share of revenue in GDP had collapsed to around 5
percent, a level below that required to finance the state’s essential functions.
Further risk factors include various legacy effects of recent conflict, such as
polarization, militarization, and displacement. A safety valve was created
through the drastically slowed rate of population growth, attributed to emi-
gration and high mortality related to the turmoil. This slowdown in popula-
tion growth also implied less competition for the limited opportunities gen-
erated by the economy.
The Restoration of Peace

The policy objectives of a postconflict government such as that of Uganda in
1986 must differ from those of a government conventionally embarking on
economic reform in the sense that the former must place greater priority on
state security. The risk of conflict in Uganda was evidently unacceptably high.
The government needed to make improving the prospects of internal peace a
top priority, to address through whatever means it had available.
The final part of table 2.1 estimates the risk of internal conflict as of
1999. It predicts a drastic reduction in risk from nearly 16 percent during
1986–91 to only 2.4 percent for 1999–2004. This is an astonishing turnaround,
and it is therefore important, both for Uganda and for other postconflict
societies, to understand the various elements that contributed to this en-

hanced internal security. First, however, note that the Collier-Hoeffler model
focuses only on the occurrence of large-scale internal conflicts. Although
saved from large-scale internal conflict, as of 1999, Uganda was far from
being at genuine peace. It was engaged in an external war in the neighbor-
ing Democratic Republic of Congo. Internally, two groups, the Lord’s Re-
sistance Army and the Allied Democratic Front, were conducting organized
rebellion. However, neither group constituted a major widespread threat
of combat deaths or a challenge to the government’s survival. This level of
conflict was somewhere between civil war and banditry, and the groups
received much of their funding from external sources. A useful way to think
about the restoration of peace in Uganda during 1986–99 is to pose the fol-
lowing questions: Why were the Lord’s Resistance Army and Allied Demo-
cratic Front unable to escalate their operations to become a serious threat,
despite receiving external “pump-priming” finance?
The NRM government’s main economic achievement was policy improve-
ments that delivered rapid, broad-based growth. This growth reduced the
risk of conflict in three respects. First, rapid growth implied opportunities
for young entrants to the labor force. Compared with the early 1980s when
the economy was declining, the late 1990s saw an improvement in the per
capita growth rate by 6 percentage points and this dramatically reduced the
risk of conflict. Second, the growth cumulatively raised per capita incomes.
Although by 1999 the economy had not recovered to the level of 1970, it was
much higher than in 1986. Third, the higher level of income was accompa-
nied by a diversification of income away from primary commodity exports,
as is typical for economies with rising income. Furthermore, policy reform
and aid both directly reduce primary commodity dependence (in addition to
any effects via the level of income [Collier and Hoeffler 2000a]), and the sharp
improvement in Ugandan economic policy and the support of the donor com-
munity both contributed directly to export diversification.
As the Ugandan peace persisted, it generated a virtuous circle in which
the risk of conflict as the issues of polarization, militarization, and displace-
ment were gradually addressed.
The government addressed the problem of polarization by restoring po-
litical rights and including potential opponents within the regime. As of 1985,
Uganda had been classified on the Polity III scale as completely lacking demo-
cratic practices (Jaggers and Gurr 1995). Especially in highly fractionalized
societies, a lack of democracy significantly impedes economic growth. Collier
(forthcoming) finds that in a society as fractionalized as Uganda, the change
from repression to full democracy will typically increase the growth rate by
nearly 3 percent. Although Uganda had not achieved full democracy as of
1999, it had made substantial progress. Because there is still an embargo on
formal campaigns by political parties during elections, members of parlia-
ment campaign as individuals. However, in other respects Uganda has
achieved a highly open society. The press is free, and several major political
figures have returned to Uganda from exile. A genuinely contested and non-
violent presidential election took place in 1996.
The underlying high fractionalization of Ugandan society was potentially
a major asset; but political identity depends on history and government be-
havior. The experience of conflict may have tended to polarize Uganda’s ini-
tially highly fractionalized society into north versus south and Buganda ver-
sus non-Buganda. Hence, to restore security the government attempted to
rebuild diversity, with the restoration of the kingships being a case in point.
The government also addressed the problem of demilitarization. The large
armies of both the former government and the NRM needed to be demobi-
lized, but doing so presented the risk that their members might either take to
violent crime or be ready recruits for new rebel movements. Thus, major
demobilization was delayed until 1993/94. Once soldiers were demobilized,
they were taken to their home villages and given transitional financial and
material assistance. Soldiers appear to have reintegrated into society. During
the first year of demobilization, crime did not tend to increase in districts
where many soldiers had been demobilized. However, the demobilization
could have been even more successful. Overall, some 12 percent of demobi-
lized soldiers reported in advance of their demobilization that they did not
have access to land. These soldiers were around 100 times more likely than
the average Ugandan to commit crimes once demobilized (Collier 1994).
Hence, in retrospect, the ideal policy would have either retained the landless
in the army or made greater provision for them. While no direct evidence
shows whether demobilized soldiers have joined rebel groups in significant
numbers, the fact that they did not differentially resort to crime suggests that
they did not differentially resort to rebellion, because from the potential
recruit’s perspective these choices are somewhat similar.
Overall, the policies of poverty reduction, sectorally diversified growth,
democratization, social pluralism, and demobilization that the government
has implemented reduced both the underlying risk factors, such as primary
commodity dependence and the risks from the social legacies of the conflict.
The policies that enhanced security involved a potential tradeoff with
the ability to achieve economic growth. Two policy options that were prob-
ably more important for security than for overall growth were the target-
ing of growth in the north, and the expansion in education. The north was
the poorest region because it was the least accessible (and parts of it are the
least fertile), and probably offered the lowest returns on public investment.
Investment in education required a long gestation period before returns
began to be realized. Hence, from an economic standpoint, higher priori-
ties probably existed. However, investments in education would probably
have reduced the incentive to join rebel forces, as recruits were drawn dis-
proportionately from illiterate young men. For example, a 1993 census of
the Ugandan army, which by then combined the previous official army and
the originally guerrilla forces of the NRM, showed that its recruits were far
less educated than the average Ugandan.
In any event, rebellion, albeit at a low level, has continued to be a costly

problem for the economy. Hence, it may have been desirable to accept a
slightly slower rate of growth in the first decade of the NRM government to
reduce the scale of this problem in the second decade. Since 1986, the north-
ern region has been most prone to rebellion, a predictable outcome. This re-
gion has grown more slowly than other regions, but from a security stand-
point, more rapid growth would have been desirable. Similarly, if in the
NRM’s first decade more children had been educated, by its second decade
fewer illiterate youths without prospects would have been available for rebel
movements to recruit into their ranks. From the standpoint of security, the
universal primary education initiative of 1997 should have been implemented
a decade earlier.
Growth Policies in the Context of the Postconflict Economy

This section shifts the focus from security to the objective of economic growth.
As of 1986, Uganda had in place a range of policies and institutions likely to
impede growth, so in one respect the government needed to embark upon a
conventional liberalization strategy. However, given that Uganda was a
postconflict economy created both opportunities and constraints that would
not otherwise have existed. This section discusses the considerations that
Uganda faced because of its postconflict inheritance. The effects of conflict
described previously provide the framework for the discussion.
Public Spending Priorities

Consider the policy implications of an atmosphere characterized by destruc-
tion and dissaving of assets and diversion of public expenditure from eco-
nomic to military purposes. This environment created a need to reconstruct
the infrastructure. This aspect of postconflict policy is one that donors are
most familiar with, because the government must make investment expen-
ditures on infrastructure at a time when its resources are very limited. In
Uganda, the main infrastructure deterioration was probably in the road sys-
tem, which had not been maintained. Society’s shift back out of subsistence
and into a market economy makes road maintenance a critically important
function. Collier and Pradhan (1998) show that the rate of return to Ugandan
transport projects during the first years of peace was an astonishing 40 per-
cent. Hence, projects such as road maintenance must take priority over ex-
penditures with lower payoffs.
The spending priorities of the Ugandan government broadly reflected
society’s changing needs. Military expenditure was reduced as a share of
total expenditure, the police force was rehabilitated, and in 1993/94 there
was substantial demobilization of the army. Despite these reductions, mili-
tary expenditure remained high as the government built a better-equipped
force, partly in response to the continued threat to internal security.
The sector most favored by the public was road construction. A survey
by Bigsten and Kayizzi-Mugerwa (1999) found that the public service im-
provement that rural households most appreciated was the road network.
However, not all restoration of infrastructure was so successful. Electricity,
which had received no new investment after 1971, (except for rehabilita-
tion in the late-1980s), gradually became a severe problem as supply failed
to keep up with demand. Because Uganda is landlocked and cannot cheaply
rent mobile power stations, and because the gestation period for obtaining
increased supply is long, it became essential to plan electricity supply care-
fully. As Reinikka and Svensson show (in chapter 7 in this volume), by 1998
Ugandan firms reported electricity as their single most important constraint
to productive investment and growth. Around a quarter of firms’ total in-
vestment in machinery and equipment consisted of private generators,
which could only produce electricity at a high cost. Hence, the failure to
rectify the neglect of electricity investment must count as one of the major
policy errors of the period.
Priorities for Institution Building

Now consider the policy implications for a society characterized by disrup-
tion of transactions as a result of rising opportunism and a declining police
force. The decline is of such magnitude that it threatens the ability of society
to transition back to a society of trust. Tirole (1992) shows how both high
opportunism and low opportunism societies can be locally stable equilibria.
In the Ugandan context, the shortening of horizons and breakdown of con-
tract enforcement mechanisms during the period of disorder seems likely to
have shifted the society from a low-opportunism to a high-opportunism equi-
librium. Restoring peace may itself be insufficient to shift the society back to
the low-opportunism equilibrium, but had peace been maintained through-
out, the society may have remained in the low-opportunism equilibrium. In
this environment, what are the implications for policy?
The high level of opportunism becomes a constraint upon policy, and
thus reducing opportunism becomes a priority. When opportunism is high,
it implies that many aspects of government will function badly because the
professional ethics that normally govern conduct will have eroded. This was
markedly the case in Uganda. The erosion of ethics affected the legal, ac-
countancy, medical, education, and civil service professions. Its consequences
were far-reaching. If the legal profession no longer enforces standards of con-
duct, then the last-resort means that firms normally use to enforce contracts
becomes unreliable. One important consequence is that banks then find it
difficult to enforce assets as collateral. A survey of banks in 1996 found that
their single greatest need was for a fast-track legal settlement procedure to
enable foreclosure on collateral (Kasekende and Atingi-Ego 1997). In the ab-
sence of this procedure, banks will lack profitable lending opportunities and
thus either restrict credit or encounter a high default rate. If the accountancy
profession no longer enforces standards of conduct, then accounts cannot be

trusted. This situation impairs both banks and the tax authorities. Banks can-
not lend on the basis of balance sheets, and tax authorities cannot levy taxes
on the basis of audited profits.
Similarly, in the medical profession standards of prescription had declined.
A survey of the leading hospital in the country found a misprescription rate
of around 50 percent. Furthermore, many medical staff pilfered drug sup-
plies and sold them privately (McPake and others 1999). As a result, although
imports of drugs were nearly adequate for the population, public clinics con-
tinually faced severe scarcity. As a result, considerable hoarding of drugs
took place at the household level. In fact, households were typically self-
prescribing home-stored drugs, many beyond their expiry date, on the basis
of self-prescription. Presumably, this practice reduced the efficiency of pub-
lic drug expenditures in reducing illness.
In the teaching profession, a high incidence of nonattendance was appar-
ent; a clean-up of teachers’ payroll removed 20 percent of teachers as “ghosts”
in 1993.
The decline in civil service conduct impaired public sector performance
in both revenue collection and service delivery. Svensson shows (in chapter
10 in this volume) that a private sector firm paying taxes and experiencing a
difference in tax assessment by the revenue authority above 50 percent pays
three times as much in bribes than a firm reporting a difference in tax assess-
ment below 50 percent.
With regard to service delivery, Reinikka shows (in chapter 11 in this vol-
ume) that only 2 percent of the money released by the Ministry of Finance for
nonsalary primary school expenditures actually reached the schools in 1991.
Even in 1995, the ratio was as low as 20 percent. A public information cam-
paign has since dramatically improved the flow of funds so that more than
90 percent of the funds now reach the schools.
The decline in professional standards had two key implications for policy.
First, as government activities are by their nature atypically dependent on self-
policed standards of conduct in the professions, the efficiency of government
expenditure would be unusually low, and the cost of tax collection unusually
high. This implied that the optimal size of government would be smaller than
in an economy without a postconflict inheritance. Second, some private activi-
ties, notably banking, were also highly vulnerable to opportunism.
The government recognized the constraints on its own efficiency and ac-
commodated them to some extent. It kept both recurrent public expendi-
tures and revenue low relative to other developing economies with less se-
vere problems of professional conduct. The government also attempted to
relax the constraints by implementing five strategies, namely:
• The government established a new tax collection service, the Uganda

Revenue Authority (URA), in which staff were paid well above civil
service pay scales and held more directly to account.
• In the area of customs collection, the government privatized many

functions, using the services of an international inspection company.
• To improve public service delivery, the government reduced the size
of the civil service (from 320,000 in 1992 to about 160,000 in 1999) and
used the expenditure savings to raise salaries.
• The government also decentralized basic service delivery to districts,
with the intention of subjecting services to the scrutiny of local elec-
torates and politicians.
• The government revived the courts by bringing in some foreign judges.
However, even by 1999 these strategies had had only limited success.
Although tax revenues had increased substantially from 5 percent of GDP in
1986 to 11 percent in 1999, revenues have shown signs of stagnation in recent
years, and the URA has been the subject of many complaints about corrup-
tion. The pay reform has not yet been adequately implemented, and the effi-
cacy of public service delivery remains quite low. Hence, the attempt to re-
build professionalism and institutions has had only limited success.
The strategies and incentives applied to revenue collection were not ex-
tended to service delivery. For example, the health service sector was not trans-
formed from civil service pay and conditions into a URA equivalent, nor were
some of its functions privatized as was the case with the customs service.
Hutchinson (chapter 13 in this volume) discusses the outcome in terms of lim-
ited demand for public health services. Generally, one can conclude that the
government was more innovative with respect to making revenue collection
work than with respect to making public service delivery work.
As mentioned earlier, the private activity most likely to be damaged by
opportunism was banking. The Ugandan banking sector inherited by the NRM
government had four private banks—all of which had survived by being con-
servative—and a large government-owned bank, which had all the problems
of the rest of the public sector. The number of private banks was too few to
support competition; thus, liberalizing the sector and attracting new entrants
was desirable. However, this priority was in danger of conflicting with the
constraints imposed by the high degree of opportunism in society. Given the
level of opportunism, it appeared prudent for the central bank to place priority
on both designing incentives and properly supervising banks to prevent dis-
honest banking practices. In any event, the policy probably placed too much
weight on the need for liberalization and did not recognize sufficiently the
constraints implied by the high degree of opportunism. By 1998, several of the
new banks had encountered severe difficulties, and the privatization of the
government-owned commercial bank had proved a fiasco.
Flight Capital
The policy implications of the massive shift of assets abroad, which had taken
place during the period of disorder, created both a major problem and a major
opportunity for the government. By 1986 some 60 percent of private wealth

was held abroad. As a result, the private capital stock per member of the labor
force had been declining, making it among the lowest in the world. As a result,
Uganda was chronically short of private capital. In principle, it had three means
of recapitalizing the economy: through domestic private savings, through at-
tracting foreign capital, and through inducing the repatriation of its own wealth.
Of these, the first was neither feasible nor desirable. There was, of course, some
scope for raising the private savings rate, but as incomes had fallen to very low
levels, it was important to increase consumption as rapidly as possible. The
second option was not likely to succeed because Uganda’s history of social
disturbance did not enhance perceptions that the country was suitable for for-
eign investment. A good measure of this is the Institutional Investor (various
years) risk rating, which is, in effect, a poll of international business opinion.
As of 1986, Uganda had the worst rating of the 25 African countries that were
then rated. Furthermore, evidence shows that the ratings are quite persistent
(Haque, Nelson, and Mathieson 2000), and even a rapid improvement in the
underlying investment environment would not lead to a rapid reappraisal of
Uganda on the part of foreign investors. Repatriation was therefore the most
realistic option for recapitalizing the economy. If Uganda’s own private wealth
could be recovered, the private capital stock could more than double.
Globally, three features influence capital flight: risk, exchange rate over-
valuation, and the amount of wealth per capita (Collier, Hoeffler, and Pattillo
forthcoming). Table 2.3 applies this global relationship to estimate the share
of Ugandan private wealth held abroad in 1985 and 1998. This approach is
analogous to that used in table 2.1 to measure the change in the risk of war.
The high level of capital flight as of 1986 is no mystery. The two main
drivers of capital flight—poor risk ratings and exchange rate misalignment—
were both extreme problems. As measured by the Institutional Investor sur-
vey of private investment opinion, the risk ratings were among the lowest in
the world at only 5.1 out of 100. Similarly, a distortion index, at 198 (100
equals the average level of distortion), showed the Ugandan shilling to be
among the most misaligned currencies in the world (Dollar 1992). The loss of
capital gradually reduced the private capital stock per worker: by 1986 capi-
tal per member of the labor force was around 10 percent below its 1971 level.
Uganda thus faced a severe problem of undercapitalization.
The progress of policy reform divides into two clear phases: 1986–92 and
1992 to the present. In the first phase, neither of the major determinants of
capital flight were much improved. The Institutional Investor risk ratings were
essentially unchanged by 1992, standing at only 5.2. There was greater
progress toward reducing exchange rate misalignment, but by 1992 the dis-
tortion index developed by Dollar (1992) was still at the very high level of 87.
Hence, our analysis would predict that because of the lack of reform of these
two variables, little change would occur in the experience of capital flight.
This indeed was the case. In most of the intervening years, capital flight con-
tinued to be a severe problem, and as a result, the private capital stock per
Table 2.3. The Predicted Change in Flight Capital as a Proportion of

Ugandan Private Wealth, 1985 and 1998
Effect on
flight (change
Value of variable in in percentage
Uganda of private
Variable 1985 1998 Change Coefficient d wealth) e
Risk ratinga 5.1 20.3 +15.2 –0.497 –7.6
Exchange rate
misalignmentb 198 35 –163 –0.000878 –33.0
Wealth (US$)c 383 395 +12 0.000889 0.0
Total predicted –40.6
(Actual, 1986–97) –10.0
a. The risk rating is that of the Institutional Investor, averaged for the year.
b. The exchange rate misalignment measure is the distortion index by Dollar (1992), which
measures exchange rate misalignment due to a variety of factors. The value used in the regression
is the square of this index.
c. The stock of private wealth per worker for 1985 is taken from the data generated by Collier,
Hoeffler, and Pattillo (forthcoming). It is estimated for 1998 using their methodology, whereby
the ratio of wealth to GDP is assumed constant, so that wealth in 1985 is simply scaled up by the
growth in GDP.
d. The coefficients on these variables come from Collier, Hoeffler, and Pattillo (forthcoming,
table 2).
e. The contribution to capital flight is the product of the variable and its coefficient in each
year.
Source: Collier, Hoeffler, and Pattillo (forthcoming).
member of the labor force continued to decline. By 1992, 67 percent of pri-

vate wealth was held abroad.
During the second phase, that is since 1992, progress has been remark-
able. The government rebuilt investor confidence by implementing a wide
range of measures. It returned confiscated property to its former Asian own-
ers in order to restore and clarify property rights. This was a politically diffi-
cult first step, because it involved handing back assets to an emigrant ethnic
minority, and sometimes required expelling people currently living in prop-
erties. The second step was to simplify procedures using an investment au-
thority. The third step was to attain macroeconomic stability and economic
liberalization. As discussed in chapter 3 (in this volume), inflation was re-
duced to single-digit levels and held there, foreign exchange reserves were
accumulated, the exchange rate was gradually made fully convertible, and
trade policy was liberalized. The fourth step was to signal strong political
commitment to the reform process. For example, during the year of the presi-
dential election around a third of the civil service was dismissed. This signal-
ing was reinforced by the response of the international financial institutions:
Uganda was the first country to obtain highly indebted poor countries’ (HIPC)
debt relief in 1998. Cumulatively, these measures had dramatic effects on

confidence. The Institutional Investor risk ratings have improved sharply, from
5.2 in 1986 to 22.9 in 2000, overtaking countries such as Côte d’Ivoire. Simi-
larly, the liberalization of the exchange rate led to a massive improvement in
the Dollar distortion index, which fell from 87 in 1992 to 35 in 1997. The
cross-country analysis would predict that this improvement would lead to a
major reversal of capital flight. Indeed, using the coefficients of the Collier-
Hoeffler-Pattillo model, these reforms predict a massive capital repatriation,
resulting in around 40 percent of private wealth returning to Uganda. The
model is a cross-section equilibrium model, and thus does not indicate how
long private wealth holders would take to adjust to this new equilibrium. It
might, for example, take a decade for portfolios to fully adjust to the new
policies. However, the Ugandan data on capital flight show an immediate
response. There are four different measures of capital flight available (see
Collier, Hoeffler, and Pattillo forthcoming). Taking the average of these four
measures, a clear and dramatic reversal has been demonstrated, from capital
flight to capital repatriation (table 2.4).
The scale of the repatriation as of 1997, although substantial, was still well
short of that predicted by the model. Specifically, by 1986, 60 percent of Ugan-
dan private wealth was outside the country. By 1991 the rate had deteriorated
to 67 percent. By 1997 (the most recent data), repatriation had reduced the fig-
ure to 50 percent. Thus 17 percent of Ugandan private wealth had been repatri-
ated from abroad between the start of the 1992 reforms and 1997. The model
predicts that around 40 percent of wealth would be repatriated. This prediction
takes into account that portfolios had yet to fully adjust to the new equilibrium;
thus, repatriation could be expected to increase further in subsequent years.
To summarize, by 1997 the Ugandan government had turned the tide of
capital flight. In only five years, 17 percent of private wealth had returned to
the economy. Yet even in 1997, some 50 percent of private wealth remained
abroad. There was thus enormous potential for continued repatriation: the
private capital stock could be doubled.
Table 2.4. Capital Flight and Repatriation, 1991–97
Year Capital (in US$ millions)

1991 –17.3
1992 –15.0
1993 +16.8
1994 +160.3
1995 +59.0
1996 +108.9
1997 +311.3
– Indicates capital flight.
+ Indicates repatriation.
Source: Collier, Hoeffler, and Pattillo (forthcoming).
These effects created both constraints and opportunities for a postconflict

government that would not be present to the same degree in economies em-
barking on liberalization from an inheritance of peace. On balance, the op-
portunities probably outweighed the constraints. Collier (1999) finds that
growth during the first five years of peace after a civil war depends on the
duration of the conflict. After long conflicts growth rebounds, presumably in
part because the exodus of capital has already been completed and peace
induces repatriation. After a 15-year conflict, growth rebounded by 6 percent
per year over the underlying performance of the economy. Although the dis-
ruption prior to 1986 was intermittent rather than continuous, the cumula-
tive effects on output were even more severe than would typically have been
experienced by a continuous civil war of 15 years. During 1986–98, the
economy considerably outperformed the average, but not by more than one
would expect for an economy in the early years of recovery from a long inter-
nal conflict. Even by 1999 the economy had not returned to the per capita
GDP level reached in 1971.
This picture is not intended to belittle the government’s achievements.
The recovery from a long conflict is not automatic and requires careful policy
management. Rather, it suggests that the government has taken the opportu-
nities provided by a postconflict situation. However, it cautions against treat-
ing Uganda as simply a conventional case of liberalization; the same policy
sequence in a society that had not emerged from a long conflict might yield
slower progress in terms of growth.
Economic Liberalization
This section explores the economic liberalization agenda in more detail. The
focus is on trade liberalization and privatization of state-owned enterprises.
Trade Liberalization
Trade liberalization has been central to Uganda’s structural reform pro-
gram. The government did not need the political argument of reciprocity
to be able to reap the gains from trade liberalization; it achieved substantial
liberalization unilaterally. However, because the liberalization program has
had no international institutional framework, it has had no enforcement
mechanism, and hence only limited credibility, at least initially. For example,
in the 1998 survey of firms, two-thirds of the respondents expected the trade
regime to be further liberalized, while one-third expected liberalization to
be reversed or stalled.
During the 1970s, export taxation and quantitative restrictions on imports
characterized trade policy in Uganda. Exports were taxed, directly and implic-
itly, at very high rates. All exports except for coffee collapsed under this taxa-
tion. For example, tea production fell from a peak of 20,000 tons in the early
1970s to around 2,000 tons by the early 1980s, and cotton production fell from
a peak of 87,000 tons, to 2,000 tons. By contrast, coffee exports declined by
around one-third. The decline in coffee was cushioned by three factors: coffee
trees depreciated only slowly, production required few inputs, and about a
quarter of it could be smuggled abroad (Henstridge 1996). Hence, exports be-
came highly concentrated in coffee (around 90 percent). Part of the export taxa-
tion was achieved through overvaluation of the exchange rate, which was pro-
pelled by intense foreign exchange rationing, but mitigated by an active illegal
market. Manufacturing based on import substitution collapsed along with the
export sector as a result of shortages, volatility, and rationing of import licenses
and foreign exchange. President Amin’s policy toward foreign investment was
dominated by confiscation without compensation, and he expelled more than
70,000 people from the Asian community.
In 1986 the NRM government inherited a trade regime that included exten-
sive nontariff barriers, biased government purchasing, and high export taxes,
coupled with considerable smuggling. The nontariff barriers have gradually
been removed since the introduction in 1991 of automatic licensing under an
import certification scheme (World Trade Organization 1995). By 1995 a short
negative list remained, consisting of beer, soft drinks, cigarettes, car batteries,
and used car tires. This list was designed to prevent smuggling and to protect
revenue. In particular, only by banning imported beer was it possible to sus-
tain high taxes on domestic production. Smuggled beer could be detected sim-
ply by observing imports at a point of sale; had imported beer carried a high
tariff instead of a ban, smuggling would have been much more difficult to
prevent. In 1999, the bans on the remaining products on the list were lifted.
Similarly, central government purchasing was reformed and is now subject to
open tendering without a preference for domestic firms over imports.
During the early 1990s, the structure of trade taxes switched from export
taxation to import taxation. The coffee export tax was abolished and import
tariffs were introduced, initially at a fairly high level. Import taxes were re-
tained because of the quest for public revenue (see chapter 9 in this volume).
Even by 1996 trade taxes still accounted for more than half of revenue, and
revenue had more than doubled as a percentage of GDP during the decade.
A strong rationale prevailed for removing, or substantially reducing, the cof-
fee tax, because this tax had manifestly damaged exports. However, in re-
placing export taxes with taxes on imports the government failed to recog-
nize the equivalence between export taxes and import taxes (see, for example,
World Bank 1996). Had imports been financed entirely by coffee exports and
had the two tax rates been the same, the administrative upheaval involved in
the switch from export to import taxation would have had no real effect. In
practice, various features made the two taxes less than fully equivalent, but
only one of them constituted an argument in favor of levying the tax on im-
ports instead of exports. In addition, an obvious argument against the switch
was the presence of many import tariff rates in place of only a single export
tax rate. Thus the switch introduced dispersion into trade taxation, which
would likely increase allocative inefficiency.
The switch from export taxation to import taxation enabled three compo-
nents of imports not financed by coffee exports to be taxed. The first category
was imports financed by noncoffee exports. Given that the government was
rightly desperate to increase noncoffee exports to lessen export concentra-
tion, it would have avoided such a tax had it been made explicit. The second
category was imports financed by program aid, under which donors lent or
gave foreign exchange to the government, which then sold it to the private
sector. Clearly, as the value of this foreign exchange to private agents equaled
the value of the imports they purchased, taxing imports had an offsetting
effect on the value of the foreign exchange. As a result, the government ended
up paying the import tax itself by getting less for its sales of foreign currency.
The third category was those imports financed by private capital inflows.
This was the only legitimate case for the switch to import taxation, and it
was not negligible, as private capital inflows exceeded the value of coffee
exports for most of the 1990s. However, these inflows of private capital in the
early years of the reform were probably socially useful in reputation rebuild-
ing for Uganda, and so, even in this case, it is not clear that the government
really wanted to tax them. At the same time, the switch from export taxation
to import taxation was combined with a mass of import tax exemptions, which
introduced an additional layer of distortions (Short 1995).
In summary, whether the switch was worth it is questionable given the
increased administrative complexity involved. The benefits of trade liberal-
ization came not from this switch, but from the subsequent reduction in the
rates of import taxes, when the government recognized that import taxation
had many of the features of export taxation.
By the mid-1990s, the import tariff schedule had five ad valorem rates be-
tween 0 and 60 percent. For more than 95 percent of imported items the tariff
was between 10 and 30 percent (Reinikka 1997). During the latter half of the
1990s, the government implemented a major tariff reduction program. As a
result, by 1999 the tariff system had been substantially rationalized and lib-
eralized, which gave Uganda one of the lowest tariff structures in Africa. The
maximum tariff is now 15 percent on consumer goods, and there are only
two other tariff bands: zero for capital goods and 7 percent for intermediate
imports. Regional trade has even lower tariff rates (6 and 4 percent, respec-
tively) but carries a 10 percent surcharge, as other Common Market for East-
ern and Southern Africa (COMESA) countries continue to maintain much
higher tariff rates. At present, the average tariff on imports from the COMESA
preferential trade area is 5.5 percent; from the rest of the world, it averages
12.9 percent. The median tariff for imports from the COMESA area is 4 per-
cent, compared with 7 percent for the rest of the world. The current trade-
weighted tariff is 6.5 percent (Short 2000).
As mentioned previously, by the mid-1990s, exemptions, legal and ille-
gal, dominated the import tax system. Smuggling was estimated at 15 to 20
percent for beer and cigarettes, and 5 to 10 percent for soft drinks. Legal
exemptions amounted to 25 to 40 percent of the total value of imports. The

major groups included goods imported by international organizations, plant
and equipment imported by licensed investors, raw materials not available
locally used by “important and high value added industries” as specified
by the Ministry of Finance and Economic Planning in consultation with the
Uganda Manufacturers Association, discretionary exemption for anything
“in the national interest,” and all inputs incorporated into exports. As part
of the import tax reform, firm-specific exemptions were to be curtailed. How-
ever, firm survey evidence indicates that by 1997 the situation had not
changed significantly: 12 percent of firms enjoyed exemptions from import
taxes in 1995 and 16 percent did so in 1997 (see chapter 7 in this volume).
The tariff reduction in the latter half of the 1990s had a marked impact on
the levels of protection. The average effective rate of protection declined from
34 percent in 1994 to 15 percent in 1999, and the dispersion as measured by
the standard deviation was reduced from 47 to 23 percent during the same
period (Short 2000).2 However, the current structure of protective taxes (in-
cluding excise taxes used as import surcharges), which range from 0 to 27
percent, inevitably produces a wide spectrum of effective protection at the
individual product and company level, depending on value added and the
specific protective taxes on inputs and outputs. The granting of exemptions
further compounds the remaining problem.
Coffee Liberalization
At independence Uganda inherited a government-controlled marketing and
pricing system for coffee. The dominance of the Coffee Marketing Board
(CMB) continued until the early 1990s. Transportation of exports was also a
state (railways) monopoly, and the difference between the producer and bor-
der prices—created by export taxation and an overvalued exchange rate—
was a major source of public revenue. Payments to farmers, mostly
smallholders, were typically delayed for long periods of time. Key activities,
such as research, extension, promotion, quality control, and export process-
ing, were all conducted solely by the CMB (Akiyama forthcoming). With the
sharp fall of world coffee prices, which started in 1989 after the collapse of
the International Coffee Agreement export quota system, the government
kept producer prices low to reduce crop financing requirements and its fiscal
deficit. As a result, by the late 1980s incentives to coffee farmers had fallen
dramatically, and the status quo in the coffee sector became unsustainable.
The government, led by its reform advocates, liberalized the coffee sec-
tor in 1991–92 with the support of World Bank conditionality. The CMB was
converted to a publicly-owned corporation, while regulation and quality
2. Estimates in Short (2000) are based on data from 59 manufacturing firms.

issues were assigned to the newly created Uganda Coffee Development Au-
thority. The Bank of Uganda was relieved of its responsibilities to provide
crop financing, which was taken up by commercial banks. Other reform
measures included removing the dual exchange rate system and export tax,
and allowing prefinancing arrangements and the formation of joint venture
companies. These measures introduced a completely new dimension to the
coffee business in Uganda by increasing the liquidity and greatly reducing
the problems of crop finance (Akiyama forthcoming). Similarly, the mode of
transport used by coffee exporters was deregulated.
A consequence of coffee liberalization was increased competition among
exporters in purchasing coffee from the producers. After liberalization, the
number of private exporters skyrocketed to more than 100, but has since fallen
to about 50 registered exporters. As a result of increased competition, pro-
ducer prices received by coffee growers increased sharply, both in absolute
terms and as a share of border prices (from 20 to 30 percent to more than 80
percent). Farmers who used to have to supply coffee to the primary coopera-
tives on credit are now paid in cash.
Following a short coffee boom in 1994–95, coffee production increased
sharply from 2.7 to more than 4 million 60-kilo bags per year. Several factors
apart from the coffee boom contributed to the strong supply response. First,
thanks to higher domestic producer prices (even before the boom), farmers
became more interested in investing in coffee and undertaking good hus-
bandry. Second, seedlings of the high-yielding varieties became more readily
available. These varieties had been developed in Uganda a few decades ear-
lier, but seedlings had only been available to farmers in limited quantities
(Akiyama forthcoming). The situation changed drastically when privately-
run nurseries were allowed following liberalization. Many nurseries now
provide seedlings to farmers who have increased both production and ex-
ports. Third, other private investment includes export-processing facilities
by major exporters and the establishment of large coffee farms by private
firms and individuals. Finally, removing export taxation shifted the direc-
tion of smuggling so that growers in the neighboring countries began to sell
their coffee to Uganda instead of Ugandan farmers smuggling through Kenya,
which had always avoided taxing coffee exports.
While prompted by a combination of international market conditions and
top-down donor conditionality, coffee liberalization has been a success both
in terms of private sector development and poverty reduction (for more ex-
planation on the latter, see chapter 4 in this volume). The private sector made
good use of the opportunities provided by the liberalization. Evidence of
this includes the large number of private firms that entered the coffee export
business and the investment in processing, nurseries, and plantations.
Prior to liberalization, the government was concerned about the private
sector’s ability to fulfill the role of exporting coffee carried out by the CMB.
To ensure no disruption of exports, the marketing branch of the CMB was
transformed into a limited company to continue coffee exports, while com-

peting with the private firms. The government’s concern did not material-
ize as domestic processors and merchants trading other commodities en-
tered the coffee export business (Akiyama forthcoming). In addition, several
large international coffee trading firms entered the market. Another con-
cern the government had about liberalization was crop financing, or the
ability of Ugandan exporters and traders to pay coffee growers. This con-
cern was effectively solved through prefinancing arrangements. Under this
system, Ugandan exporters made arrangements with foreign importers for
advance payments.
Investment Policy
Uganda has a history of expropriation of foreign investment. The incentive
system was biased in favor of domestic firms. For example, under the initial
rules of the preferential trade agreement, tariff preferences were only given
to domestic majority-owned firms. This system was revoked through three
major initiatives. First, the investment code of 1991 established the rights of
foreign investors. Second, the Departed Asians Property Custodian Board
returned confiscated properties to their previous owners. A statute of limita-
tions required that claims be made by 1995 to prevent indefinite contestability
of titles. Third, the dependence of preferential trade agreement preferences
on majority domestic ownership was revoked in 1992.
Under the investment code, foreign investment is subject to prior, but
nearly automatic, approval by an investment authority. Upon receiving an
application, the investment authority is legally required to issue a report
within 30 days and to make a decision within another 14 days. Typically,
decisions take only a few days. Applications must be approved if the appli-
cation complies with the code and the activity is not “contrary to the inter-
ests of Uganda.” Approval may be conditional upon specified minimum con-
tribution of capital by the investor, a commitment to employ and train citizens
with a view to Africanization, an agreement to use Ugandan inputs where
they are “competitive,” and assurances that the operation is not ecologically
or economically harmful. However, hardly any applications have been re-
jected on these grounds.
Investment licensing is subject to separate application procedures, but is
normally done hand-in-hand with project approval. Once licensed, all inves-
tors used to be eligible for duty and tax exceptions.3 Duty exemptions were
discontinued in 1995 and replaced by zero rating of capital goods for all in-
vestors. Corporate tax holidays were discontinued in 1997, but those granted
prior to 1997 could be retained until they expired. Domestic investments are,
3. The normal entitlement used to be exemption from profits tax for three to six
years; drawback of any duties and sales taxes levied on the inputs used for export
production, exemptions on imports of capital goods, unrestricted repayment of foreign
in principle, not subject to the investment authority’s approval, but busi-

nesses operating without a license would not have qualified for any of the
benefits under the investment code.
Privatization
In the late 1980s, more than 150 public enterprises (defined as majority state
owned) were engaged in virtually all sectors of the economy. They employed
more than 30,000 people, accounting for more than a quarter of total formal
employment in the firm sector, and generated about 10 percent of GDP. The
performance of these enterprises was characterized by low productivity, high
losses, and rising debts, which placed a considerable burden on the banking
system, public finances, and the balance of payments. For example, in 1992
most public enterprises received direct and indirect subsidies from the gov-
ernment (estimated at 50 percent of total domestic revenue), credits from the
banking system (amounting to about 18 percent of total credit), grants and
foreign loans (4 percent of outstanding external debt service obligations),
and accumulated internal and external arrears. Only one firm was making a
profit. The government initiated a program of public enterprise reform and
divestiture in 1992 to redefine the role of the state in the economy, reduce the
financial and administrative burden on public resources, and increase effi-
ciency and private investment.
By the end of 1999, the government had completed 93 divestitures of
enterprises in the industrial, commercial, agricultural, and hotel sectors,
privatizing 62 firms and liquidating the remainder. Only one firm was sold
to the public through the sale of shares on the stock exchange. Twenty firms
were sold to foreign investors. To date, total costs related to divestiture
have exceeded the proceeds. This has occurred because the firms’ valua-
tion was typically based on book value, which in many cases was higher
than their market value; the size of debts and arrears was greater than ex-
pected; and the liberalization of the economy and reduction of subsidies
negatively affected the firms’ value.
A recent assessment based on firm-level evidence suggests that
privatization has succeeded in turning around the performance of many
former public enterprises (UMACIS 2000). In most cases, privatization led to
increased output and efficiency, higher tax payments, significant new invest-
ment, and some job creation. The government also reduced direct subsidies
to the public enterprise sector (that is, cash injections, investment subsidies,
and donor grants) from a record high of U Sh 87 billion in 1997 to U Sh 9
loans and interests, and the transfer of dividends and proceeds on disposal of as-
sets. Foreign and domestic investors were both eligible for the same benefits, but a
higher qualification level applied for foreign investors than for Ugandans. The
threshold for certificates of incentives is US$50,000 for locals compared with
US$300,000 for foreigners.
billion in 1998.4 A survey of stakeholder perceptions indicates that fiscal, so-

cial, and economic objectives for privatization had been achieved, but that
the process through which the firms were sold was perceived to have been
corrupt. Respondents suggested that the impact of privatization would have
been higher had it not been for the uneven implementation of the program
and other shortcomings. These shortcomings included inadequate legal and
institutional arrangements, ill-defined responsibilities and accountability, lack
of broadly based ownership of the program and transparency in a number of
transactions, and the executing agency’s failure to collect payments from
buyers. All these led to parliament’s decision to partially suspend and inves-
tigate the privatization program in early 1999.
Despite a qualified success with privatization of commercial enterprises to
date, the remaining parastatals account for most employment and the bulk of
the fiscal burden. They include utilities, which comprise electricity, water, and
sewage; transport services; and other large public enterprises, which are mostly
engaged in manufacturing, construction, agribusiness, tourism, trade, and fi-
nancial services. These enterprises continue to place a heavy burden on the
budget. Public resources are insufficient to restore the financial viability of these
enterprises and maintain the existing infrastructure, let alone improve the cov-
erage and quality of these services. Against this backdrop, the government has
decided to overhaul the key utility sectors, including telecommunications, elec-
tricity, water and sewage, and rail transport.
In telecommunications, the postal and telecommunications company was
restructured into three new entities: telecommunications, post, and post of-
fice bank. The sector was opened up to competition and the government
awarded two operator licenses for basic telecommunications services through
a competitive process. The results have been impressive, and the number of
lines in service has more than doubled in a short time, thanks to mobile phone
service. For electricity and air transport, significant restructuring initiatives
involving greater reliance on private participation have been approved and
are at various stages of implementation. However, in other sectors, such as
rail transport, and water and sewage, reforms were attempted without a clear
assessment of the sectors’ requirements, and little competition. With regard
to a regulatory framework, the government intends to explore the possibili-
ties of establishing a multisector regulatory agency, which would include the
newly created telecommunications and electricity regulator.
Impact on Investment and Exports
The average real GDP growth rate was 6.3 percent per year during the en-
tire recovery period (1986–99) and 6.9 percent in the 1990s. One obvious
4. However, indirect subsidies doubled in 1998 reaching U Sh 203 billion, an

increase due mainly to increases in loans and tax arrears in public utilities.
explanation for the high growth rates is the preceding economic contrac-
tion, the result of economic mismanagement in 1971–85. During this pe-
riod, the capital stock shrunk and capacity utilization was low. Hence, much
of the subsequent growth resulted from the increased use of capacity, the
improved allocation of existing resources, and the return of both human
and financial flight capital. As these kinds of opportunities become increas-
ingly scarce, significant private investment will be required to stimulate
the economy.
What is the macroeconomic evidence on the investment response to liber-
alization? According to the national accounts, private investment increased,
on average, by 13 percent per year in the past decade. The coffee boom in
1994–95 created a peak during which private investment (in constant prices)
grew by almost 40 percent, while its share of GDP increased from 9.9 to 12.4
percent (lower panel in table 2.5). The largest increase was in machinery and
equipment investment. Since then, growth in private investment has slowed,
but the level of investment achieved during the coffee boom has been main-
tained and even slightly surpassed previous levels in 1997–98. Following the
initial rehabilitation phase of the late 1980s, the share of public investment in
GDP has fallen to about 6 to 7 percent, while the share of total fixed investment
has ranged between 15 and 20 percent of GDP. For comparison, until recently
the share of investment was much higher (about 30 percent of GDP) in the fast
growing East Asian economies. In addition, such high levels were maintained
for more than two decades. This implies that a higher investment level is re-
quired to sustain Uganda’s growth performance in the future.
The liberalization of trade has had a marked effect on export performance
as demonstrated by macroeconomic data (table 2.6). In the 1990s export vol-
umes grew (at constant prices) at an annualized rate of 15 percent, and im-
port volumes grew at 13 percent. As a percentage share of GDP, exports in-
creased from 7.8 percent in 1990/91 to 15.8 percent in 1996/97 (but fell to
12.7 percent in 1997/98) (table 2.6). The value of noncoffee exports increased
fivefold between 1992 and 1999. Sustaining Uganda’s growth performance
requires maintaining the favorable trend in export growth.
The macroeconomic picture of investment and export response provides
a useful framework for chapter 7 (in this volume), which examines invest-
ment response at the firm level using microeconomic survey data, and for
chapter 8, which looks at firms’ export response and productivity at the
microeconomic level.
The Role of Aid

Uganda’s postconflict recovery and economic reforms have benefited from
generous foreign aid (table 2.7). Some 21 countries have been active donors
since 1987. During the initial reform period, Uganda received substantial
multilateral aid, but in the 1990s bilateral grant aid became the dominant
source of external finance. Technical assistance made up almost one-third of
total grants during the period 1987–96. According to Holmgren and others
Table 2.5. Investment as a Share of GDP at Market Prices, Fiscal Years 1986/87–1997/98
(percent)
Category 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98
In current prices
Fixed investment 9.7 10.8 11.1 12.7 15.2 15.9 15.2 14.6 15.4 16.6 15.5 15.5
Public investment 4.3 5.6 5.4 6.2 7.4 7.4 6.7 5.4 5.4 6.3 5.6 5.6
Private investment 5.4 5.2 5.7 6.5 7.8 8.5 8.5 9.1 10.0 10.3 9.9 9.9
Machinery and
vehicles 3.8 4.5 4.4 5.2 6.1 6.0 5.3 4.7 5.6 5.4 3.7 3.4
40
Construction 5.9 6.3 6.7 7.5 9.0 9.9 9.9 9.9 9.8 11.2 11.8 12.0
In constant prices
(1991 = 100)
Fixed investment 17.8 20.2 18.1 17.2 16.8 15.5 15.1 15.5 19.5 20.2 18.8 19.3
Public investment 10.2 12.4 10.4 9.3 8.3 6.9 6.3 5.7 7.1 8.0 6.8 5.9
Private investment 7.6 7.8 7.6 7.9 8.5 8.6 8.8 9.9 12.4 12.2 12.0 13.5
Machinery and
vehicles 8.5 9.6 8.1 7.4 6.8 5.6 5.0 4.9 7.6 7.1 5.1 4.8
Construction 9.3 10.6 10.0 9.9 10.0 9.9 10.1 10.7 11.9 13.1 13.7 14.6
Source: Bureau of Statistics data.
Table 2.6. Export Shares of GDP, Fiscal Years 1990/91–1997/98

(percent)
Exportsa/GDP
Fiscal year Current prices Constant prices
1990/91 7.5 7.8
1991/92 8.8 8.7
1992/93 7.1 7.7
1993/94 8.7 9.5
1994/95 11.8 11.0
1995/96 12.0 12.8
1996/97 13.1 15.8
1997/98 10.3 12.7
a. Exports consists of goods and nonfactor services.
Source: Bureau of Statistics and Ministry of Finance, Planning, and Economic Development
data.
(1999), various evaluations show that Uganda made exceptionally good use
of technical assistance, including learning from the experience of other Afri-
can reformers, such as Ghana. However, despite continuous progress in
Uganda’s public expenditure management, donor-funded projects are still,
largely initiated through direct contacts between line ministries or districts
and the donors and are not integrated into the government’s medium-term
expenditure framework and budget. Similarly, the number of nongovern-
mental organizations has exploded in recent years, from about 1,000 in the
mid-1990s to more than 3,000 in 2000, which at least partially reflects the
availability of donor funding.
Apart from aid inflows, bilateral creditor governments in the Paris Club
have agreed on debt rescheduling for Uganda on several occasions since 1981.
Before the HIPC initiative was introduced, a portion of Uganda’s multilat-
eral debt was serviced by a number of its bilateral donors. Uganda was the
first country to benefit from the HIPC initiative in 1998 as well as from the
enhanced HIPC in 2000 (a total of US$1 billion of debt relief in net present
value terms). A commercial debt buy-back was arranged with the Interna-
tional Development Association’s support in 1993 (US$153 million of com-
mercial debt was bought at 12 cents per dollar).
How important has foreign aid been to Uganda’s reform effort? A recent
assessment concludes that financial aid and its associated conditionality have
played a positive role in supporting Uganda’s reform agenda (Holmgren and
others 1999). In particular, they helped generate and implement policy reforms
in the late 1980s and early 1990s, when reform advocates within the govern-
ment used conditionality to help push the policy changes. Since 1992, when
government ownership of the reform agenda was secured, conditionality has
become less instrumental in inducing reforms. Consequently, policy dialogue,
Table 2.7. Foreign Currency Inflows, Fiscal Years 1989/90–1998/99
Category 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99
US$ (million)
Exportsa 245.7 198.9 195.1 237.8 333.1 667.1 725.6 824.8 633.7 726.4
Current private
transfers 78.0 80.5 135.9 107.9 303.7 329.9 421.1 322.1 539.2 375.0
Foreign direct
investment — — — — — — 110.4 160.0 190.0 230.0
ODA flows, netb 409.1 385.1 272.6 779.1 427.4 599.8 504.8 536.9 641.9 572.1
Total 732.8 664.5 603.6 1,124.8 1,064.2 1,596.8 1,761.9 1,843.8 2,004.8 1,903.5
Percentage of GDP (PPP)c
Exports 1.95 1.45 1.31 1.45 1.87 3.28 3.22 3.50 2.57 2.74
Current private
42
transfers 0.62 0.59 0.92 0.66 1.70 1.62 1.87 1.37 2.19 1.41
Foreign direct
investment — — — — — — 0.49 0.68 0.77 0.87
ODA flows, net 3.25 2.81 1.84 4.75 2.39 2.95 2.24 2.28 2.60 2.15
Total 5.83 4.86 4.07 6.86 5.96 7.86 7.83 7.82 8.13 7.17
Memo items
GDP (PPP, million) 12,574 13,685 14,842 16,407 17,855 20,318 22,504 23,568 24,658 26,549
Net aid as percentage
of public expenditure 33 59 47 57 66 62 52 45 44 48
— Not available.
Note: 1998/99 data are preliminary.
a. Exports include goods and nonfactor services.
b. ODA flows, net, are official development assistance disbursements less amortization.
c. GDP valued at purchasing power parity (PPP) exchange rate, hence these numbers differ from those in table 2.6.
Source: Bank of Uganda and World Bank data.
advisory services, and technical assistance have assumed a greater role, as con-
tinued financial assistance has allowed a much higher level of public spending
than would have been possible within the limitations of the country’s own
resources. (The share of foreign aid has ranged between 33 and 66 percent of
total public expenditure; see table 2.7). It is interesting that the assessment by
Holmgren and others (1999) considers the continuity and long tenure of the
government’s economic team as critical in the process of achieving broad own-
ership of the reform program.
How important has foreign aid been to Uganda’s growth performance? In
an effort to quantify the effects of aid, results of the recent cross-country analy-
sis by Collier and Dollar (1999) can be applied to Uganda. Using data from
more than 100 countries, they test the hypothesis that the better the policy
environment, the more effective aid is in raising growth, and that aid is subject
to diminishing marginal returns. The hypothesis indeed appears to be true.
The quality of policy variable (annual cross-country ratings by World Bank
country specialists are used) and the aid and policy interaction term are both
positive and significant in the growth regression, and aid squared (that is, aid
being subject to diminishing marginal returns) is negative and significant.5 Thus
the policy environment determines how rapidly diminishing returns elimi-
nate the marginal contribution of aid to growth. The Collier-Dollar cross-
country analysis is a straightforward tool for calculating the change in Uganda’s
growth rate, assuming that aid inflows were zero, all else being constant. The
difference between the actual growth rate (with actual aid flows) and the cal-
culated hypothetical case of no aid is 1.7 percent per capita per year. Thus, in
the absence of aid, the growth rate per capita would have been 3.8 percent per
year instead of 5.5 percent (GDP is expressed in terms of purchasing power
parity in these calculations). The contribution of aid was therefore 31 percent
of the actual growth rate. This should be taken as a conservative estimate. As
demonstrated by Holmgren and others (1999), aid in Uganda’s case has had a
positive effect on policy, so the overall growth effect of aid is likely to be some-
what greater than what is estimated here.
Finally, how important has aid been to poverty reduction? Appleton shows
in chapter 4 in this volume that the headcount index of poverty fell from 56 to
44 percent, or 12 percentage points, in 1992–97, and that this decline was al-
most entirely attributable to growth (95 percent). The annual average poverty
reduction was hence 2.4 percentage points. The simplest way to estimate the
impact of aid on poverty is to use the ratio of the growth rate attributable to aid
and the actual growth rate multiplied by the decline in the headcount index
that was attributable to growth.6 This calculation suggests that 29 percent of
5. Other control variables include institutional quality, initial income, and re-
gional and period dummies.
6. (1.7/5.5)* P0 = 0.31* P0, where P0 is change in the headcount index of poverty
attributable to growth.
the decline in poverty was due to aid. The rate of poverty reduction achieved—
thanks to foreign aid—was then 0.7 of a percentage point per year.
Conclusions
Since 1986, the Ugandan government has faced two policy challenges: reduc-
ing the risks of conflict in a conflict-prone society and reducing poverty in a
very poor economy. The risk of conflict comes partly from the economic and
political inheritance at independence, and partly from the economic and po-
litical consequences of prolonged conflict between 1971 and 1985. The eco-
nomic inheritance implied a high risk of conflict because of the country’s de-
pendence on natural resources and its low levels of education. The government
has taken several action steps to diversify the economy, and more recently has
worked to increase educational attainment. The economic consequences of the
prolonged conflict included massive capital flight and the breakdown of many
institutions, including the professions. The government has achieved consid-
erable success in reversing capital flight through a range of measures that have
rebuilt investor confidence. It has embarked upon the task of rebuilding insti-
tutions, but this is a long process. The political inheritance at independence
was a paper democracy, but democratic institutions did not survive when tested.
The consequences of prolonged conflict were a legacy of suspicion and bitter-
ness. The government has made considerable progress in promoting reconcili-
ation, by encouraging the return of former political leaders and traditional
rulers. It has also built more robust democratic institutions, most notably a free
and active press, and has decentralized decisionmaking.
Overall, by 1999 the society was considerably safer from internal large-
scale conflict than it had been both at independence and at the start of the
Museveni government. During the 1990s, the economy staged a remarkable
recovery from the collapse that had occurred during the conflict, and experi-
enced one of the highest economic growth rates in the world. However, even
with this impressive performance, the country was only about to achieve the
level of GDP per capita inherited at independence.
In the early 1990s, the Ugandan government embarked on economic liber-
alization in earnest, including external trade, privatization of public enterprises,
and the return of confiscated properties to their former Asian owners. In trade
policy, the most important changes were the removal of quantitative restric-
tions and foreign exchange rationing. The switch from export taxation to im-
port taxation, however, missed an opportunity to radically reduce the taxation
of exports because of revenue considerations. It gave the appearance of having
removed export taxation without the reality, because the general equilibrium
effects of import taxation were broadly equivalent to the earlier export tax.
Once government expenditure had risen to utilize the additional revenues raised
from import taxes, it became more difficult to reduce these rates than if the
import taxes had not been introduced in the first place. Nevertheless, during
the latter part of the decade, tariff reductions were implemented, which gave
Uganda one of the lowest tariff structures in Africa.
Major privatization of commercial public enterprises has also taken place.

Many of these loss-making enterprises have been turned around by their
new owners and are now contributing to growth, investment, employment,
and public revenue. However, progress in reforming and privatizing public
utilities has been much slower. They continue to present a heavy fiscal bur-
den and provide poor service. Privatization has also suffered from lack of
transparency and corruption in some of the transactions, which has tainted
the entire process.
Because considerable reallocation and rehabilitation of the existing pro-
ductive capacity has already taken place, growth rates are unlikely to be sus-
tained in the future without a higher share of investment and continued ex-
port growth and diversification. Thus, a challenge for Uganda’s future
economic growth is to implement policies conducive to technological change,
private investment, and export growth, while at the same time ensuring that
both private and public capital are efficiently employed.
Finally, foreign aid has contributed substantially to Uganda’s growth per-
formance and poverty reduction, estimated at 31 and 29 percent, respectively.
These should be interpreted as conservative estimates because, according to
recent assessments, aid has also had a positive effect on policy reforms and
hence contributed indirectly to growth and the decline in poverty.
References
Akiyama, Takamasa. Forthcoming. “Background, Process, and Results of
Recent Coffee Market Liberalization.” In Takamasa Akiyama, John
Baffes, Donald F. Larson, and Panos Varangis, eds., Lessons from Mar-
ket Reforms over the Last Two Decades. Regional and Sectoral Studies.
Washington, D.C.: World Bank.
Bigsten, Arne, and Steven Kayizzi-Mugerwa. 1999. “Crisis, Adjustment, and
Growth in Uganda. A Study of Adaptation in an African Economy. Lon-
don: Macmillan Press.
Collier, Paul. 1994. “Demobilization and Insecurity: A Study in the Econom-
ics of the Transition from War to Peace.” Journal of International Devel-
opment 6: 343–51.
_____. 1999. “The Economic Consequences of Civil War.” Oxford Economic
Papers 51: 168–83.
_____. Forthcoming. “Ethnicity, Politics, and Economic Performance.” Eco-
nomics and Politics.
Collier, Paul, and David Dollar. 1999. “Aid Allocation and Poverty Reduc-
tion.” Policy Research Working Paper no. 2041. World Bank, Develop-
ment Research Group, Washington D.C. Processed.
Collier, Paul, and Anke Hoeffler. 2000a. “Aid, Policy, and Peace.” World Bank,
Development Research Group, Washington, D.C. Processed.
_____. 2000b. “Greed and Grievance in Civil War.” Policy Research Working Paper
no. 2355. World Bank, Development Research Group, Washington, D.C.
Collier, Paul, and Sanjay Pradhan. 1998. “Economic Aspects of the Transition
from Civil War.” In Holger B. Hansen and Michael Twaddle, eds., De-
veloping Uganda. Oxford, U.K.: James Currey; Athens, Ohio: Ohio Uni-
versity Press.
Collier, Paul, Anke Hoeffler, and Catherine Pattillo. Forthcoming. “Flight
Capital as a Portfolio Choice.” World Bank Economic Review.
Dollar, David. 1992. “Outward-Oriented Developing Countries Really Do
Grow More Rapidly.” Economic Development and Cultural Change 40(3):
523–44.
Haque, Nadeem Ul, Mark Nelson, and Donald J. Mathieson. 2000. “Rating
Africa: The Economic and Political Content of Risk Indicators.” In Paul
Collier and Catherine Pattillo, eds., Investment and Risk in Africa. Lon-
don: Macmillan.
Henstridge, Mark. 1996. “Coffee and Money in Uganda: An Econometric
Analysis.” DPhil. thesis. Oxford University, U.K. Processed.
Holmgren, Torgny, Louis Kasekende, Michael Atingi-Ego, and Daniel
Ddamulira. 1999. “Aid and Reform in Uganda Country Case Study.”
Research Series no. 23. Economic Policy Research Centre, Kampala.
Institutional Investor, Inc. Institutional Investor. Various years. New York.
Jaggers, Keith, and Ted Robert Gurr. 1995. Tracking Democracy’s Third Wave
with the Polity III Data. Journal of Peace Research 32(4): 469–82.
Kasekende, Louis, and Michael Atingi-Ego. 1997. “Financial Markets and
Monetary Policy in Sub-Saharan Africa: The Experience of Uganda.”
Final draft report for the African Economic Research Consortium Col-
laborative Research Project. Nairobi, Kenya.
McPake, Barbara, Delius Asiimwe, Francis Mwesigye, Matthius Ofumbi,
Peter Streefland, and Asaph Turinde. 1999. “The Economic Behaviour
of Health Workers in Uganda: Implications for Quality and Accessi-
bility of Public Health Services.” Social Science and Medicine 49(7):
849–65.
Reinikka, Ritva. 1997. “Adjusting Trade Policy for Export Growth.” World
Bank, Eastern Africa Department, Washington, D.C. Processed.
Republic of Uganda. Various years. Statistical Abstracts. Entebbe: Bureau of
Statistics.
Short, John. 1995. “Uganda: Review of the Tax and Incentive Structure.” A
report to the Eastern Africa Department. World Bank, Washington D.C.
Processed.
_____. 2000. “Impact of Tariff Changes.” A report to the Ministry of Finance,
Planning, and Economic Development and the World Bank. Kampala.
Processed.
Tirole, Jean. 1992. Persistence of Corruption. Working Paper no. IPR55: 2–32.
Institute for Policy Reform, Washington, D.C.
UMACIS (Uganda Manufacturers Association Consultancy and Information
Services, Ltd). 2000. “Assessing the Impact of the Privatization Pro-
cess in Uganda.” A Report for the Ministry of Finance, Planning, and
Economic Development. Kampala. Processed.
World Bank. 1996. “Uganda: The Challenge of Growth and Poverty Reduc-
tion.” A Country Study, Washington, D.C.
World Trade Organization. 1995. Trade Policy Review: Uganda, vol. 1. Geneva:
World Trade Organization Secretariat.
3
Exchange Reforms, Stabilization, and

Fiscal Management
Mark Henstridge and Louis Kasekende
Uganda’s strong macroeconomic performance in the 1990s was based on

two key reforms: the legalization of the parallel market in foreign exchange
in 1990, and the achievement of macroeconomic stability in 1992. The legal-
ization of the parallel market paved the way for a broader liberalization of
exports, especially coffee. In turn, the liberalization of the coffee sector made
possible one of the single biggest reductions of poverty in Uganda by en-
suring that the bulk of the windfall proceeds from the 1994–95 coffee boom
went to coffee-growing households (see chapter 4 in this volume). The ex-
change reform arose from a vigorous debate within Uganda, and was not a
result of donor conditionality.
Uganda has maintained price stability since 1992 through both prudent
budgeting and careful implementation of fiscal and monetary policy.1 Prices
have remained stable despite large requests for supplementary expenditures
from some ministries and agencies within each fiscal year. Although the an-
nual budget determined the overall fiscal stance, control was maintained by
The fiscal policy discussion in this chapter draws upon material from an In-
ternational Monetary Fund working paper (Henstridge forthcoming) and work car-
ried out at the Centre for the Study of African Economies, University of Oxford. The
latter (Henstridge 1997) was funded by a research grant from the U.K. Department
for International Development, which is gratefully acknowledged. The authors are
grateful to the Ministry of Finance, Planning, and Economic Development, the Bu-
reau of Statistics, and the Bank of Uganda for the use of their data; however, none of
these institutions is responsible for any errors or misinterpretations.
1. The analysis presented in this chapter is based on data up to mid-1997. The
cash flow system described continues to operate, with some modifications.
49
50 Mark Henstridge and Louis Kasekende
implementing the budget through the operation of the “cash flow,” which
was both a spreadsheet-based framework for monitoring resources and spend-
ing each month as well as the key focus of the monthly cash flow committee
that was responsible for ensuring that fiscal policy remained consistent with
low inflation. By tracking the fiscal position each month, the cash flow table
was a timely substitute for nonexistent treasury accounts, and provided a
way to regularly review the fiscal situation and to make short-term fiscal
adjustments in response to shocks. During the period covered by this chap-
ter (largely up to mid-1997), a short-term adjustment meant controlling cash
releases; more recently, control has been extended to include spending min-
istries’ freedom to enter into commitments. Stabilization policy that targeted
inflation through short-run fiscal adjustments was perhaps unusual, but was
nonetheless effective.
Success in managing aggregate spending provided the foundation for
significant improvements in expenditure allocations toward basic services
(Republic of Uganda 2000) and in the effectiveness of public service deliv-
ery (see chapter 11 in this volume). Upon establishing control of the bud-
get aggregates, the government could start to focus on specific reforms in
budgetary operations, such as civil service reform or funding for roads. In
turn, the government then established a medium-term expenditure frame-
work that reflects the priorities of public policy in the composition of spend-
ing that remains, in aggregate, within the available resources, over a three-
year horizon.
This chapter analyzes the stabilization record and the macroeconomic re-
forms carried out in the 1990s. First, it sets out the main arguments of the ex-
change rate debate in the late 1980s. It describes the progress from a dual ex-
change system, through an auction, to a unified rate—with an interbank market
and a retail bureaux de change market—in November 1993, as well as the opera-
tion of the exchange rate policy since then. Second, the chapter discusses how
price stability was achieved in 1992 and has been maintained since. It empha-
sizes the distinctions between the ex ante budget and the ex post outcomes
given the government’s need to respond to shocks during the fiscal year. Third,
the chapter reviews the costs and tradeoffs of a relatively clean-floating ex-
change rate, the rationale for targeting inflation, the relative merits of short-
term fiscal adjustment and monetary policy, and the implications of short-term
fiscal adjustments for volatility in public expenditure. Finally, the chapter high-
lights some of the budget management reforms made possible by the earlier
success in controlling aggregate spending.
Exchange Reforms
The National Resistance Movement (NRM) government’s instinctive ap-
proach to economic policy was dirigiste. It was implicitly assumed that eco-
nomic agents would respect the basic requirement of military discipline to
obey orders. However, President Museveni appeared to have sufficient intel-
lectual self-confidence to allow an open debate on economic policy.
Exchange Reforms, Stabilization, and Fiscal Management 51
While fighting the second Obote government, the NRM established the
objective of an “independent, integrated, self-sustaining economy” as part
of its 10-point program for government. In 1986 a group sponsored by the
International Development Research Centre of Canada was charged with
developing a strategy for economic recovery that would achieve the NRM’s
objective. A minority of the group favored a revaluation of the exchange rate
and administered prices. It was, essentially, an approach that sought to mend
the old control regime. Proponents of this approach believed that devalua-
tion would fuel inflation and slow recovery by raising the cost of imported
inputs. Although their views were contrary to those held by a majority of the
International Development Research Centre group, the governor of the cen-
tral bank was appointed from the minority. The official exchange rate was
then revalued in nominal terms. The economy did not respond favorably.
With inflation accelerating from 120 percent in May 1986 to 240 percent in
May 1987, the real appreciation of the official exchange rate reached around
380 percent over the same period.
An agreement with the International Monetary Fund (IMF) and the World
Bank in 1987 on a package of reforms included a currency reform and a large
nominal devaluation of the exchange rate. Although the decision to seek donor
assistance was made with the support of President Museveni, the debate over
the exchange rate continued for another three years. In addition, little con-
sensus was reached regarding the importance of price stability, or how to
achieve it. Inflation remained high, fueled by credit to the government to
finance loose control of the budget and by rapid growth in credit to the mo-
nopoly marketing boards, mainly the Coffee Marketing Board, to finance the
purchase of export crops. The official exchange rate was occasionally deval-
ued to recover the ground lost to inflation. However, no consistent direction
on macroeconomic strategy was established until early 1990.
Two developments influenced the exchange rate debate. First, a govern-
ment seminar in 1989 that was designed to take a critical look at Uganda’s policy
under the NRM government brought together academics, politicians, and offi-
cials formally to discuss economic reform for the first time. The seminar was
useful in providing open discussions and sensitizing all participants about the
key issues—including the role of the parallel market in foreign exchange (or
kibanda)—in everyone’s lives. Second, the Presidential Economic Council pro-
vided a forum for an increasingly focused debate between ministers holding
economic portfolios and senior officials. Ministry of Planning and Economic
Development officials led the argument for macroeconomic stabilization and
liberalization in a statement of macroeconomic strategy called The Way For-
ward I (Republic of Uganda 2000).2 They recommended prudent budgeting to
control inflation, promotion of exports through legalization of the parallel mar-
ket, and devaluation of the official exchange rate to a competitive level.
2. In an early example of transparency, this document was later published.

Legalizing the Parallel Market and Exchange Rate Unification
The prevailing wisdom within Uganda was that a depreciation of the offi-
cial exchange rate led to inflation that, in turn, led to a depreciation of the
parallel market rate and thus reestablished the previously existing premium
between the parallel and official rates. This conclusion was also reflected in
the academic economics literature. For example, Kharas and Pinto (1989)
and Pinto (1988, 1989) suggest that a devaluation or float of the official ex-
change rate could be dangerous (see also Lizondo 1987). If the local cur-
rency equivalent of a (net) foreign currency payment—say, for debt—is fi-
nanced by increased credit to the government, which is monetized, then
the ensuing inflation does indeed depreciate the parallel market and rees-
tablish the premium. Under the assumptions regarding foreign payments
made in Kharas and Pinto’s model, they also showed that a constant crawl
exchange rate regime was stable.
Analysis within the Ministry of Planning and Economic Development,
however, came to the opposite conclusion: that a devaluation of the official
rate would both help the government implement a budget consistent with
low inflation and would not lead to an offsetting depreciation of the parallel
exchange rate. In addition, a persuasive argument for legalizing the parallel
rate was the widely shared observation that, in reality, everyone used and
needed that market, and that this fact should be legally recognized.
The analysis supporting the argument for a sharp depreciation of the
official exchange rate was presented in two Ministry of Planning and Eco-
nomic Development discussion papers (Morris 1989a,b). The first paper
showed that changes in the parallel market exchange rate quickly led to
changes in the price level. The parallel market exchange rate and the price
level were both increased by increases in the money supply, which was
mainly a result of central bank financing of the budget deficit. The parallel
market rate was also lowered, or stabilized, by allocations of official for-
eign exchange by the central bank for consumer goods. The second paper
focused on the impact of official exchange rate devaluation in Uganda. It
demonstrated that the official exchange rate did not directly determine any
component of the official balance of payments. The paper then discussed
the impact of an official exchange rate devaluation on the government bud-
get by tracking its role as an accounting price in the government’s budget.
Because the government was a net seller of foreign exchange—courtesy of
donor support—then a devaluation increased the shilling value of foreign
exchange receipts more than it increased the shilling value of foreign ex-
change payments. This effect remained when adjustments to the retail prices
for petroleum products and the official producer price of coffee were in-
cluded. Therefore, for a constant nominal shilling level of other expendi-
tures, a devaluation of the official exchange rate led to a reduction in the
budget deficit, and consequently reduced the need for financing from the
central bank. The lower central bank credit to the government reduced the
growth in the money supply, and therefore reduced inflation and the rate
of depreciation of the parallel market exchange rate.3
Morris (1995) formalized these arguments. First, Morris showed that the
results from Kharas and Pinto (1989) and Pinto (1988, 1989)—that a constant
crawl exchange rate regime was stable and that attempts to unify the ex-
change rate were doomed to end in higher inflation—depended crucially on
the assumptions made regarding the structure of foreign exchange transac-
tions in the budget. Given the underlying structure of Uganda’s budget in
the late 1980s and early 1990s (where inflows of donor balance of payments
support easily outweighed debt payments), exchange unification lowered
inflation and a constant crawl exchange rate regime was unstable. Because a
constant crawl (albeit interspersed with periodic devaluations) accurately
characterized the exchange rate regime in the late 1980s, this latter result of
inherent instability helped explain part of the difficulties in implementing
macroeconomic programs during that period.
Backed by this analysis, the Presidential Economic Council approved
the Way Forward I strategy. The legalization of the parallel market was
announced in the 1990 budget, along with a sharp depreciation of the offi-
cial exchange rate. Transactions remaining at the official rate were con-
fined to government transactions and the sale of coffee export proceeds.
All other export proceeds could be sold at the prevailing market rate. The
legalization of kibanda was a bold reform that went beyond the condition-
ality agreed with the IMF. It triggered a rapid expansion in noncoffee ex-
ports, from about US$25 million in 1990 to around US$125 million four
years later. It also greatly eased the process of current transfers and re-
leased any residual rationing in imported consumer goods. Perhaps most
important, legalization of the parallel market laid the foundation for the
liberalization of coffee exports.
Exchange Rate Unification

Kasekende and Malik (1994) argued that a weekly auction of official foreign
exchange, which began in early 1992, had largely eliminated the overvalua-
tion of the official rate. The clearing price in the auction was the exchange
rate for official transactions. The auction was well funded with donors’ im-
port support, and in only 2 of the first 10 auctions did total bids exceed the
amount offered for sale. Nonetheless, a premium between the parallel and
official rates persisted.
3. See also Kasekende and Ssemogerere (1994), who concluded that in 1987–92,
domestic prices and parallel exchange rates were both driven by monetary expansion
due to slack fiscal policy.
Kasekende and Malik (1994) argued that the transactions in the official
and the parallel markets were imperfectly segmented. Some private import-
ers could source financing in either of the two markets, creating a link be-
tween them. In particular, excess demand for foreign exchange in the official
market spilled over into a relatively depreciated exchange rate in the parallel
market. The only way to eliminate this effect was to merge the two markets.
Other structural factors helped explain why a premium remained between
the market rate and the official rate, even when the official rate appeared not
to be overvalued any longer. For example, imports financed from foreign
exchange bought at the auction had to be “eligible” merchandise imports
and financed using a letter of credit, a requirement that ruled out most small-
scale importers. Perhaps most important, imports financed from foreign ex-
change bought from the Bank of Uganda at the official exchange rate were
more likely to be assessed for import taxes than those financed through the
market, for which documentation requirements were less stringent. Indeed,
the exchange rate premium narrowed in March 1992 when all shipments were
required to be cleared by customs centrally, rather than at the border, where
it was easier to evade import duties.
An interbank market replaced the auction in November 1993. This action
unified the rates as well as the transaction costs—and evened out the likeli-
hood of being taxed—for both markets. As a result, the market rates appreci-
ated toward the (former) official rate, rather than converging on the rela-
tively depreciated bureaux exchange rate.
Figure 3.1 shows both the official exchange rate and the market rate for
1985–98. The wide premium during the late 1980s, at a time of rapid depre-
ciation, is clear. From 1990 onward, the more rapid depreciation of the offi-
cial rate rapidly narrows the premium until 1992. During the auction in 1992–
93, the premium persists until the new interbank rate in November 1993
effectively eliminates it. The residual difference between the interbank and
bureaux rates reflects the fact that the former is largely a wholesale market,
while the latter mostly caters for small, spot transactions. The figure shows a
sharp appreciation in the exchange rate from late 1993 through 1994. This
difficult period of exchange rate management is discussed next.
Managing a Floating Exchange Rate

The move to the interbank market in 1993 provided Uganda with a unified,
floating exchange rate. During this period, two developments provided new
challenges for managing the exchange rate. First, progress on the return of
property confiscated by the Amin regime from the Asian population in 1972
had led to an increase in private transfers for reinvestment in those assets.
Second, coffee prices rose toward the end of 1993 and in the early months of
1994 and, following a frost in Brazil, increased sharply in mid-1994. With
coffee marketing and exports now liberalized, the increased export earnings
Figure 3.1. The Official/Interbank and the Parallel/Market Exchange

Rates, 1985–98
1,400
1,200
1,000
Per US$
800
600
400
20
0
1985 1987 1989 1991 1993 1995 1997
The parallel/market The official/interbank
exchange rate exchange rate
Source: Ministry of Finance, Planning, and Economic Development data; Research Department,
Bank of Uganda data.
and the subsequently repatriated proceeds fueled a significant increase in

the supply of foreign exchange to the market. This situation, in turn, led to
episodes of sharp exchange rate appreciation beginning early in 1994 and
problems associated with large foreign exchange inflows (see Kasekende,
Kitabire, and Martin 1996 for more details about the management of foreign
exchange inflows). The difficulties provoked by the combined effect of capi-
tal repatriation and the sharp increase in international coffee prices lasted
through mid-1996. The approach taken to exchange rate policy evolved as
experience was accumulated.
The first intervention in the foreign exchange market was in December 1993,
shortly after the start of the interbank market. When the Bank of Uganda ob-
served the rate appreciation, it intervened to slow it, but with little effect. Ap-
parently importers were less willing to pay a high price for foreign exchange
because of the growing requirements to submit to customs inspection and as-
sessment regardless of their source of foreign exchange. (Previously, only those
who had bought funds at the Bank of Uganda auction were checked thoroughly
on the value of their shipments.) In other words, the relatively tax free market
exchange rate was moving more toward the tax-inclusive rate.
Because the earlier Bank of Uganda intervention had had relatively little
effect, the limits of intervention in exchange rate management were already
apparent. Yet, intervention was justified to promote market stability, and thus
preempt market panic. The accumulation of foreign exchange, coupled with
strong pressures for an appreciation of the rate, led to a situation where some
banks refused to quote for the purchase of foreign exchange. As these events
unfolded in the market, government policy remained that the authorities
would not target any particular exchange rate, but would intervene to main-
tain orderly market conduct.
The 1994 market developments appeared to have led to a relatively rapid
maturity in most market participants, and it also helped establish some cred-
ibility for the government’s laissez faire approach to the exchange rate. Al-
though subsequent periods of turbulence have taken place, the overall per-
formance of the foreign exchange market as a way to determine the exchange
rate and allocate foreign exchange has been good enough for it not to have
been called into question.
The Achievement of Macroeconomic Stability

Uganda achieved macroeconomic stability in 1992 following a fiscal crisis.
Although commitment to macroeconomic stability was part of the adjust-
ment programs agreed to with the IMF and the World Bank from 1987 on-
ward, repeatedly loose control of budget implementation had resulted in
larger than planned fiscal deficits. These deficits were financed by borrow-
ing from the central bank, and the resulting monetary expansion led to an
average annual inflation rate of 191 percent between 1986 and 1989.
Implementation of the budget closely followed the planned budget in
fiscal year 1989/90, which helped inflation drop significantly. However, the
following year was characterized by a renewed loss of fiscal control, a conse-
quent expansion in credit to the government, and increased inflation. Two
shocks in the first half of 1991/92 drove inflation further up. First, a drought
led to sharply increased food prices. Second, there was a shortfall in both
revenues and program aid inflows. The revenue shortfall was a result of overly
optimistic projections, while aid inflows fell short partly because some do-
nors waited for a foreign exchange auction to start in January 1992 before
disbursing, but also because others did not deliver on pledged support. By
December 1991 only one-fifth of the program aid budgeted for the fiscal year
had been received. Despite this shortfall in resources, no offsetting adjust-
ment was made to expenditures, which were financed by an increase in credit
to the government equivalent to 40 percent of the money stock. As a result,
inflation surged to a peak monthly rate of 10.6 percent in April 1992 (equiva-
lent to an annualized rate of more than 200 percent).
In response to the accelerating crisis, the ministries of Finance and Plan-
ning and Economic Development were merged in March 1992. The new man-
agement, largely from Planning and Economic Development, then cut ex-
penditure in the fourth quarter of 1991/92 by the equivalent of 1.8 percent of
gross domestic product (GDP).4 This measure stopped the increase in credit
to the government, the expansion of the money supply, and the rise in infla-
tion within three months.
The stabilization in the last quarter of 1991/92 marked the beginning of
stability and accelerated growth in GDP. From July 1992 until June 1997,
annual inflation averaged 6.6 percent and growth averaged 7.5 percent. The
top two rows of table 3.1 summarize the fiscal roots of the pre-1992 inflation
and the stability that followed. The outcome of fiscal policy is shown in
terms of domestic government financing as a percentage of GDP and in terms
of the change in the government’s net credit at the Bank of Uganda. Because
markets for government bonds remained thin, domestic budget financing
was largely dependent on credit from the central bank.5 Hence these indica-
tors show the magnitude of monetary expansion caused by fiscal policy.
Table 3.1. Inflation, Investment, and Growth before and after the
Achievement of Stability
Average Average
Category 1986/87–1991/92 1992/93–1996/97
Domestic government financing
(percentage of GDP) 1.2 –1.4
Change in Bank of Uganda net credit to
government (percentage of beginning
of period money stock) 16.5 –15.0
Growth in average level of money M2
(percent per year) 105.5 28.6
Average end-period inflation (percent
per year) 107.6 6.6
Private investment (percentage of
constant price GDP) 6.6 9.6
Growth in total GDP (percent per year) 5.2 7.5
Growth in monetary GDP (percent
per year) 6.7 9.3
Money, M2 (percentage of GDP) 6.3 9.4
Source: Republic of Uganda (various years); Ministry of Finance, Planning, and Economic
Development; Bureau of Statistics; and Research Department, Bank of Uganda data.
4. This is an understatement of the decisiveness of the expenditure adjustment,

because it does not count those originally budgeted expenditures that were cut to
accommodate demands for additional spending made during the year.
5. The primary auction for treasury bills started in 1992, and by June 1997 the
stock of outstanding treasury bills was equivalent to only 1.4 percent of GDP.
Average domestic financing was 1.2 percent of GDP between 1986/87 and
1991/92; over the same period, the average change in credit to government
was 16.5 percent of the money stock. In contrast, these same ratios for the
period 1992/93 to 1996/97 were –1.4 percent and –15.0 percent, respectively.
Even though increased foreign inflows led to a strong buildup of reserves
after stabilization, annual money growth slowed from an average of 105.5
to 28.6 percent, and as a result inflation dropped from an average of 107.6 to
6.6 percent a year over the same period.
Better fiscal management could sustain macroeconomic stability after 1992
for two reasons. First, the new management of the Ministry of Finance and
Economic Planning was explicitly mandated by the president to do so by
matching spending to resources. In a statement following the 1992 budget
speech, President Museveni said, “There will be no inflation. Inflation is in-
discipline. If there is no money then we will close down some ministries and
walk.” The New Vision (Uganda’s main newspaper) reported the following:
“On inflation, the President blamed the old team at the helm of the Finance
Ministry for mismanagement. He said, ‘You just can’t print money because
the World Bank has not given you money in time’ He observed that the act
had undermined the country’s currency” (Obbo and Waswa 1992).
The second reason was the increased willingness to make intrayear ad-
justments to budget implementation. Just as a sharp fiscal adjustment stopped
inflation, it was reasoned that simply ensuring that spending did not spin
out of control from month to month would keep inflation low.
Short-run fiscal adjustments, that is, holding back budgeted spending by
limiting cash releases, was made possible through use of the monthly cash
flow table. The monthly compilation of fiscal and monetary data allowed the
cash flow committee to track the evolution of fiscal policy. However before
discussing the data, the spreadsheet, and the work of the committee (see also
box 3.1), we put the cash flow into context by reviewing the planning of mac-
roeconomic policy.
Planning and Implementing Fiscal Policy

This section distinguishes between the ex ante planning of macroeconomic
policy, on the one hand, and its implementation through cash flow, on the other,
in order to achieve inflation objectives ex post in the face of shocks. The dis-
tinction between these two aspects of fiscal management is important.
The Budget Framework Paper

Starting in 1992/93, the annual budget was prepared using the guidelines of the
three-year Budget Framework Paper (BFP). Prepared for cabinet approval, the
BFP presented proposals for all spending—its composition and levels—that fit-
ted within available resources. The resource envelope was determined within a
Box 3.1. Cash Flow
The cash flow table showed fiscal operations every month. As the fiscal year
proceeded, data on monthly out-turns replaced the monthly projections, which
were originally based on the annual budget.
Data on revenue were based on the collections recorded by the Ugandan
Revenue Authority (URA) and available with a lag of 10 days.
Non-URA revenue (appropriations-in-aid) was recorded by the Treasury
Office of Accounts (again, with a lag).
Budget support was initially recorded by the Bank of Uganda’s Foreign
Exchange Operations (FEO) department when disbursed by the donor:
Foreign grants were shown as receipts “above the line.”
Loan disbursements were shown as positive foreign financing “be-
low the line.”
Expenditures were recorded either as releases (the value of checks printed
and issued), or as the value of checks presented to the Bank of Uganda
and paid. Expenditures were categorized as interest on both domestic
and foreign debt, as wages and salaries, and as other recurrent and lo-
cal development spending. Once district administrations were decen-
tralized, the transfers to districts were shown separately.
Foreign financing was the sum of loan disbursements and amortization.
Bank of Uganda financing was the sum of net changes in the government’s
balances at the Bank of Uganda (sometimes referred to as changes in
the “ways and means” account) and the change in Bank of Uganda
holdings of treasury bills.
Commercial bank financing was the sum of changes in government-held
accounts at commercial banks and changes in commercial banks’ hold-
ings of government securities, which could include promissory notes
as well as treasury bills.
Nonbank financing was primarily changes in the nonbank holdings of
treasury bills (although in 1996/97, a large quantity of promissory notes
was also issued).
There were differences in timing and valuation in the records of some ele-
ments of the cash flow table. For example, although the URA initially recorded
revenue as collections, the accounts of the Bank of Uganda showed revenue
only when it was received from a transfer from the URA revenue accounts at
the Uganda Commercial Bank (UCB). As a result, if URA data were to be used
as the record of revenue, an adjustment for the difference between revenue
received by the revenue account at the UCB and the revenue transferred from
the UCB into the consolidated fund at the Bank of Uganda had to be made.
(box continues on following page)
Box 3.1 continued
This situation also applied when there were differences between donor funds
received by the FEO and those credited to the government accounts, and be-
tween the value of releases, checks printed, and of checks paid and debited
from the government accounts. These alternative sources of data were used for
presentations on a commitments and on a cash basis, with the differences re-
flected in an adjustment to cash. The magnitude of the differences between
data on the same flow, but monitored at different points, was largely a function
of the slow rate at with which Bank of Uganda accounts were compiled, but
could also have been caused by different valuation dates for foreign transac-
tions. Taken together, the timing differences from different data sources, pos-
sible valuation differences, and the potential difficulties in the classification of
government accounts help explain why a residual appears at the bottom of the
cash flow spreadsheet, if not its fluctuations or magnitude (see table 3.2).
Table 3.3 shows the relationships between the various data lags for compil-
ing the cash flow and for the data on money and prices on the one hand, and
the timing of the decisions on releases taken by the monthly cash flow commit-
tee on the other. The committee usually met in the third week of each month,
when some provisional data (although not from the Bank of Uganda accounts)
would be available on the out-turn of the previous month. Actual fiscal data
for month t would not be available until month t + 2, along with base money
and a provisional figure for currency in circulation. Data on broad money for
month t would not be finalized until month t + 3, although price statistics were
usually available for each month with minimal lags.
macroframework, which used conventional financial programming to ensure

that the planned fiscal stance was consistent with projected changes in reserves,
expected growth in private credit, and monetary growth deemed consistent with
low inflation. From 1993 to 1996, the BFP also addressed some medium-term
issues in budgetary allocation, such as the wage bill and allocations to the road
sector (see Tumusiime-Mutebile 1999 for more information on the development
of Uganda’s medium-term expenditure framework). From 1996, the BFP pro-
cess began providing comprehensive allocation of spending across sectors within
the three-year macroframework, which was explicitly linked to sectoral policy
objectives. The annual budget represented, in effect, the first year of a three-year
rolling expenditure plan. The budget process was designed to better manage the
tension between demands for expenditures from various parts of government
and the resources available, consistent with both macroeconomic stability and
the government’s sectoral policy objectives.
Cash Flow
Beginning in fiscal year 1992/93, the budgeted spending plan was imple-
mented through monthly cash releases, or authorizations to spend, and the
Table 3.2. Actual Budget and Cash Flow Out-Turn, 1991/92–1996/97
(cash basis, excluding donor-financed projects)
1991/92 1992/93 1993/94 1994/95 1995/96 1996/97

Cash Cash Cash Cash Cash
Original MFEP Revised flow Government flow Original flow Government flow Government flow
Category program out-turn budget out-turn budget out-turn program out-turn budget out-turn budget out-turn
U Sh billions
Revenue and grants 333.4 242.3 421.9 406.1 460.1 488.6 527.0 594.6 678.1 727.4 891.5 860.5
Total revenue 204.1 185.4 288.0 293.2 384.7 398.9 478.3 528.8 614.0 643.8 829.3 741.4
Grants 129.4 56.9 133.9 112.9 75.4 89.7 48.8 65.7 64.1 83.6 62.3 119.0
Expenditures and net
lending 320.2 281.1 362.9 338.5 436.3 434.2 513.6 539.1 615.9 638.3 797.0 753.8
Recurrent expenditure 251.3 235.9 301.3 301.6 381.3 367.5 442.6 450.2 539.4 545.3 649.7 634.3
Domestic development
61
and net lending 68.9 45.2 61.6 37.0 55.0 66.7 71.0 88.9 76.5 93.0 147.3 119.5
Overall deficit
(commitment) 13.2 –38.8 59.0 67.6 23.7 54.4 13.4 55.5 62.2 89.1 94.5 106.7
Primary balance 3.2 –30.7 30.2 34.0 70.9 77.3 74.4 117.6 142.0 146.2 229.1 165.1
Overall deficit (cash) –14.0 –74.8 –4.6 –2.9 –37.7 –29.2 –30.9 10.2 7.8 75.0 54.0 82.0
Financing 14.0 74.8 4.6 2.9 37.7 29.2 30.9 –10.2 –7.8 –75.0 –54.0 –82.0
External 56.4 32.4 27.0 14.4 51.0 50.6 77.5 33.3 61.2 0.6 33.2 –5.3
Domestic –42.4 42.4 –22.4 –15.5 –13.4 –35.0 –46.6 –26.8 –64.1 –39.3 –75.0 –42.1
Bank of Uganda –49.4 35.3 –32.4 –21.7 0.0 –61.7 –46.6 –57.2 –51.6 –67.0 –85.0 –92.5
Residual 0 0 0 4 0 14 0 –17 –5 –36 –12 –35
Percentage of GDP
Revenue and grants 15.3 9.4 11.2 11.2 11.7 12.1 10.6 12.3 12.5 13.2 14.4 13.6
Total revenue 9.4 7.2 7.6 8.1 9.8 9.9 9.7 11.0 11.3 11.7 13.4 11.8
Grants 5.9 2.2 3.6 3.1 1.9 2.2 1.0 1.4 1.2 1.5 1.0 1.9
(table continues on following page)

Table 3.2 continued
1991/92 1992/93 1993/94 1994/95 1995/96 1996/97

Cash Cash Cash Cash Cash
Original MFEP Revised flow Government flow Original flow Government flow Government flow
Category program out-turn budget out-turn budget out-turn program out-turn budget out-turn budget out-turn
Percentage of GDP (continued)

Expenditures and net lending 14.7 10.9 9.6 9.3 11.1 10.8 10.4 11.2 11.3 11.6 12.8 12.0
Recurrent expenditure 11.5 9.1 8.0 8.3 9.7 9.1 8.9 9.3 9.9 9.9 10.5 10.1
Domestic development
and net lending 3.2 1.7 1.6 1.0 1.4 1.7 1.4 1.8 1.4 1.7 2.4 1.9
Overall deficit
(commitment) 0.6 –1.5 1.6 1.9 0.6 1.3 0.3 1.1 1.1 1.6 1.5 1.7
Primary balance 0.1 –1.2 0.8 0.9 1.8 1.9 1.5 2.4 2.6 2.6 3.7 2.6
Overall deficit (cash) –0.6 –2.9 –0.1 –0.1 –1.0 –0.7 –0.6 0.2 0.1 1.4 0.9 1.3
Financing 0.6 2.9 0.1 0.1 1.0 0.7 0.6 –0.2 –0.1 –1.4 –0.9 –1.3
62
External 2.6 1.3 0.7 0.4 1.3 1.3 1.6 0.7 1.1 0.0 0.5 –0.1
Domestic –1.9 1.6 –0.6 –0.4 –0.3 –0.9 –0.9 –0.6 –1.2 –0.7 –1.2 –0.7
Bank of Uganda –2.3 1.4 –0.9 –0.6 0.0 –1.5 –0.9 –1.2 –0.9 –1.2 –1.4 –1.5
Memorandum items
GDP (current prices, factor
cost, U Sh billions) 2,182 2,588 3,766 3,626 3,924 4,036 4,953 4,828 5,428 5,521 6,203 6,307
Annual inflation
(underlying, end–period,
percent) 50 9 9 9 9 2
Annual inflation (all items,
end–period, percent) 66 –2 16 4 5 10
Annual inflation (all items,
period average, percent) 42 30 7 8 7 8
MFEP Ministry of Finance, Planning, and Economic Development.

Note: Fiscal year runs from July 1 to June 30.
Source: Ministry of Finance, Planning, and Economic Development data.
Table 3.3. Information Lags, Cash Flow Compilation, and Short-Term Macroeconomic Management
End-Month t Month t + 1 Month t + 2 Month t + 3

Weeks 1 2 3 4 5 6 7 8 9 10 11 12
Fiscal data Uganda Revenue Non-Uganda Revenue
Authority revenue Authority revenue
collections collections and receipts
Provisional revenue Actual revenue receipts
receipts
Programmed grant Actual grant receipts
receipts
Nonproject Checks printed
expenditure releases Provisional checks paid Actual checks paid
Debt authorizations Debt payments
Treasury Provisional foreign
bill sales financing
63
and stocks Provisional Bank of Actual Bank of Actual commercial
Uganda financing Uganda financing bank financing
Provisional treasury Actual treasury bill
bill financing financing
Monetary data
Exchange rates daily Initial estimate of base Provisional Actual base money and Provisional monetary Actual monetary
money base provisional M0 survey and bank survey (including
money liquidity indicators broad money)
Real economy Month t prices Month t + 1 prices Month t + 2 prices Index of key industrial
production
Cash flow Cash flow Month t’s stance starts Cash flow
committee committee to appear in the committee
meeting meeting consumer price index meeting
for month for month for month
t+1 t+2 t+3
Source: Henstridge (1997).

magnitude of spending was decided by a monthly cash flow committee, made

up of representatives of the main institutions involved in monitoring mac-
roeconomic policy.6 Each month’s fiscal operations were tracked using the
cash flow spreadsheet, and the budgeted monthly spending limits were ad-
justed if events—particularly revenue shortfalls, additional spending de-
mands, and monetary shocks—unfolding throughout the year threatened
the achievement of low inflation.
The cash flow tables and the decisions of the cash flow committee guided
monthly cash releases in the implementation of the annual budget, but it was
not a cash budget, as operated, for example, in Tanzania and Zambia. A cash
budget typically determines one month’s expenditure with reference either to
the previous month’s revenues or some other fixed rule for balancing the bud-
get every month. In Zambia the monthly cash budget limited recurrent expen-
ditures (including domestic interest payments) to recurrent revenue (excluding
grants). As Adam and Bevan (1997) note, it is technically simpler to operate a
cash budget than a conventional budget, and thus easier to maintain control.
Publicly announcing the use of such a clearly defined and relatively simple
system allows the government to communicate commitment to fiscal discipline
to the private sector and to aid donors. Adam and Bevan also discuss some of
the difficulties with such rules-based operations, including issues related to
balancing the budget over time, which is not automatically desirable, and re-
nunciation of smoothing between (often lumpy) receipts and expenditures. In
contrast, the cash flow was more sophisticated and flexible. It did not renounce
smoothing; and its use was not the subject of a public declaration on the means
with which low inflation would be delivered. The credibility of the resource
envelope as a way of limiting total spending was bolstered by President
Museveni’s public support. Wider credibility of macroeconomic management
in Uganda has been established through a track record of low inflation.7
Each fiscal year the cash flow was based on the annual budget projections.
Revenues were projected using a seasonal pattern of revenue. The monthly
schedule for payments of principal and interest and the expected timing for
disbursements of loans and grants were used, along with a pro-rata projection
of the remaining elements of the cash flow. As the fiscal year proceeded, the
data on out-turns replaced the projections, enabling the Ministry of Finance to
track the budget implementation and thereby ensure that the decisions of the
6. The participants in the cash flow committee included departmental represen-

tatives from the Ministry of Finance and Economic Planning with an interest in rev-
enue mobilization and expenditure management, and representatives from the Bank
of Uganda with an interest in tracking the government’s foreign receipts and pay-
ments and the conduct of monetary policy. In 1998/99 the frequency of expenditure
releases changed from monthly to quarterly.
7. Stasavage and Moyo (1999) provide a more detailed comparison of Uganda’s
cash flow framework with Zambia’s cash budget operation, including the respective
benefits and drawbacks.
cash flow committee were as well informed as possible. The structure and use
of the cash flow framework is discussed more fully in box 3.1 and in Henstridge
(1997). Table 3.3 shows the sequencing of available fiscal data, the compilation
of each month’s cash flow table, the timing of price and monetary data, and
the meetings of the cash flow committee.
In the absence of shocks, the implementation of the budget through the
monthly releases monitored by the cash flow would lead to the same outcome
as a conventional budget system, except perhaps that broadly equal monthly
releases would imply more smoothing of expenditures across the fiscal year.
In practice, even in the absence of shocks, expenditure releases in Uganda were
usually less than pro rata during the first quarter because parliament tended
not to approve the budget until September. This delay also provided some
time to assess the reliability of revenue projections, particularly when there
had been changes to the tax system. Depending on the ministry’s level of con-
fidence in the revenue and aid projections, total expenditure was usually higher
in the second and third quarters than during the first quarter, and closer to the
budget. The rate of spending during the last quarter was influenced by both
performance in the first three quarters against the targets for the fiscal year as
a whole and the intensity of pressures for extra spending. This pattern of spend-
ing is illustrated in the bottom graph in figure 3.2.
Intrayear adjustments were made if either fiscal shocks emanating from
requests for supplementary spending or macroeconomic shocks exceeded the
capacity of monetary policy to maintain stability. An adjustment typically meant
a reduction in releases for nonwage recurrent spending. The use of the cash
flow for fiscal management has generally led to a tighter fiscal outcome than
originally programmed. Table 3.2 shows the budget and the out-turn recorded
by the cash flow tables between 1991/92 and 1996/97. Donor-financed projects
are excluded because compiling accurate out-turn data was problematic, and
because project expenditures could not be controlled using the cash flow. The
top part of table 3.2 shows the budget and out-turn in nominal terms. The
bottom part shows the same data as percentages of nominal GDP, using the
projected GDP for the budget and actual GDP for the out-turn. The out-turn on
inflation is shown at the bottom of the table.
In 1991/92—before the cash flow tables and regular meetings of the cash
flow committee had started—the lack of intrayear fiscal control is indicated
by domestic financing, mostly as increased credit from the Bank of Uganda,
of about U Sh 85 billion (close to 4 percent of GDP) higher than budgeted.
In contrast, a tighter than budgeted out-turn has been achieved for every
year since 1991/92. In 1992/93 revenues and grants were U Sh 16 billion
below budget projections, but expenditures and net lending were U Sh 24
billion less than budgeted, leading to a smaller overall deficit than pro-
grammed. In the following three years, revenues and grants were higher
than projected, but expenditures increased by less than the additional re-
sources (and they decreased in 1993/94). Table 3.2 shows that overall, the
planned fiscal stance in the budget has been consistent with stability. How-
ever, the fact that the out-turn was usually less than programmed implies
Figure 3.2. Actual and Counterfactual Government Budgetary

Operations, 1994/95–1995/96
(U Sh billions)
80
Expenditure
60 Counterfactual
Actual
Budgeted
40
20
0
July January June January June
1994 1995 1995 1996 1996
700
600
Base money
Counterfactual
500
400
300 Budgeted
Actual
200
100
0
July January June January June
1994 1995 1995 1996 1996
Source: Ministry of Finance, Planning, and Economic Development and Bank of Uganda data.
that achieving low inflation largely depended on careful budget implemen-

tation through the use of the cash flow.
Fiscal Shocks
The experience of resources falling short of budget projections was the main
reason for adopting a monthly cash flow system. However, since 1992 the main
fiscal shocks have come from persistent demands within the government to
increase spending within each fiscal year. To understand the potential impact
of these demands for extra or supplementary expenditures, see figure 3.2. The
top graph in this figure shows actual expenditures, the monthly average of
budgeted expenditures, and counterfactual expenditures for 1994/95 and 1995/
96. The latter are equal to the total supplementaries approved by parliament
evenly distributed over the last nine months of each fiscal year.8 Had all else
8. The amounts finally approved by parliament in 1994/95 and 1995/96 were

much smaller than those originally requested by spending ministries; in figure 3.2,
remained the same, the supplementaries would have been financed by increased
credit to government, leading to more base money, as shown in the bottom
graph of figure 3.2. Counterfactual base money peaks at U Sh 560 billion, which
is about twice both the actual and programmed levels. Assuming that prices
would have increased in proportion to the excess increase in the supply of
money, inflation would have risen to an annual rate of at least 25 percent.9 This
figure understates the consequences of such monetary expansion, because an-
nual inflation rates higher than about 10 percent are likely to lead to a sharp
reduction in the private sector’s demand for real money balances. Therefore,
higher inflation would have sharply increased the velocity of money, and in-
flation would rise much more than implied by the counterfactual series on
base money.
Given these demands for extra spending, the Ministry of Finance faced a
tradeoff. It could either keep the allocations in the original budget intact,
adding the extra supplementary spending to total spending, or it had to cut
other expenditures to retain control of total spending. As the ministry was
charged by the president to maintain price stability, it decided to keep total
expenditures within the resource envelope, and balance the supplementary
spending by cuts elsewhere in the budget.
Following the introduction of the cash flow system in 1992, there was no
shortfall in donor resources—although it was still difficult to predict the timing
of disbursements. A small shortfall of revenue occurred in 1993/94, but it was
not until 1996/97 that actual receipts were significantly less than projected, in
this case by the equivalent of 1.4 percent of GDP.10 The ability to monitor the
budget implementation through the cash flow system enabled the government
to cut expenditures (on a cash basis) by 0.76 percent of GDP, with the remaining
gap more than offset by increased foreign grants. At the same time, however,
higher expenditures (on a commitment basis) were financed by increased do-
mestic arrears. Arrears were the result of a lack of control over the line minis-
tries’ ability to enter into expenditure commitments. Despite the increased do-
mestic arrears, the adjustments made to cash expenditure in 1996/97 delivered
low underlying inflation of 2 percent, despite lower than projected revenue.11
This is quite an achievement compared with the underlying inflation of 50 per-
cent that followed the failure to adjust to a revenue shock in 1991/92. In the face
of a shock to resources, maintaining low inflation—although not impossible in
the absence of the cash flow system—was certainly facilitated by it.
they were allocated over the last nine months of the fiscal year because parliamentary
approval was not forthcoming until three months into the year.
9. Assuming a constant demand for real money balances.
10. Revenues were U Sh 90 billion less than projected, owing to sluggish imports
and the difficulties in implementing a new value added tax.
11. The underlying inflation index excluded food crop prices (but included pro-
cessed food), and was not, therefore, sensitive to the possibility that dry weather would
push up food crop prices.
External Shocks
In addition to absorbing within-year fiscal shocks, the cash flow system helped
the government respond to macroeconomic shocks that could otherwise have
led to higher inflation. As discussed previously, Uganda experienced a cof-
fee boom in 1994–96 coupled with significant inflows of foreign capital. Both
threatened to lead to a major appreciation of the exchange rate.
Generally, in formulating fiscal policy a tradeoff was perceived between
increasing donor budget support and the concern that doing so would con-
tribute to an overvaluation of the real exchange rate. This tradeoff also sur-
faced when the government’s economic team tried to dampen nominal ex-
change rate appreciation during the course of the fiscal year. To offset nominal
appreciation, increased foreign reserves were projected arising from the Bank
of Uganda intervention in the foreign exchange market; these interventions
were to be offset by reductions in net credit to government. This, of course,
implied a tighter fiscal policy.12 Similarly, if the corresponding monetary in-
jection were perceived to threaten price stability, then an offsetting reduction
in net domestic assets through fiscal tightening had to be made.
The theory behind, and actual experience of, temporary trade shocks sug-
gest that they lead to an appreciation of the real exchange rate, either through
an appreciation of the nominal exchange rate, an increase in the price level,
or some combination of both (see Bevan, Collier, and Gunning 1989, 1990;
Collier and Gunning 1996). The appropriate fiscal response to a temporary
trade shock and to increased inflows of foreign capital is to increase public
savings, which is what the Ugandan government did, as reflected in the nega-
tive central bank financing from 1993/94 onward (table 3.2). These reduc-
tions in central bank credit to the government were achieved in part by set-
ting a tight budget, but were also sustained through the cash flow system. In
addition, the government imposed a coffee stabilization tax, which was a
hotly debated topic in Uganda at the time. Arguments for and against the
coffee tax are presented in boxes 3.2 and 3.3.
The role of the cash flow in managing the consequences of the coffee boom
is illustrated in figure 3.3. The top graph shows that the increase in the terms of
trade was followed, with a lag of one quarter, by an increase in the producer
price of coffee. With a lag of another quarter, there is a sustained increase in
underlying inflation (here a weighted average of the quarterly underlying in-
flation index).13 The bottom graph shows that underlying inflation increased
sharply during 1995 and shows the discrepancy between the planned budget
and the implemented fiscal stance (as proxied by the budgeted and actual
12. Bevan (1998) concludes that the impact on the exchange rate of additional
inflows is at worst ambiguous, at best benign.
13. The means and ranges of these series have been adjusted to maximize visual
correlation, and the left-hand scale is therefore that of the terms of trade index.
Box 3.2. Arguments for the Coffee Stabilization Tax
In June 1994, frost in Brazil triggered a sharp, but temporary, increase in interna-
tional coffee prices. Uganda expected to earn US$500 million over the year to
September 1995, compared with coffee export earnings of US$180 million over
the year to September 1994. The increase in coffee export earnings was expected
to be equivalent to more than 70 percent of the stock of broad money at the end of
December 1994, and thus presented a potentially serious threat to monetary sta-
bility. The rational private response, that is, to accumulate domestic financial
assets, would look the same in the monetary statistics as an inflationary mon-
etary expansion, the difference being that the latter would quickly lead to infla-
tion. The risk was that the magnitude of monetary expansion involved could
have been so large that little could have been done in the event of an unwar-
ranted monetary expansion regardless of the source to rescue price stability.
It was not clear that the Kenyan experience during the 1970s coffee boom
would be replicated (see Bevan, Collier, and Gunning 1990). The structure of
the coffee export sector was different, being private and liberalized in the 1990s
in Uganda. Payments were made largely in cash, whereas in Kenya they were
deposited in farmer’s accounts. Finally, far fewer bank branches were within
easy reach of most Ugandan coffee farmers, raising doubts about the likeli-
hood of the coffee windfall being held in domestic financial assets (other than
cash) to the same extent as had been possible in Kenya.
Faced with these risks, the government decided to introduce a graduated
tax on coffee export earnings above a threshold. The rates and threshold were
decided following extensive consultations with the coffee exporters. The coffee
stabilization tax was set at 20 percent on receipts above a threshold of U Sh
1,100 per kilogram, and 40 percent on receipts above U Sh 2,200 per kilogram.
The lower threshold was determined relative to a normal rate of net profit. The
tax was specifically designed so that the government would save rather than
spend the money during the boom, allowing the Bank of Uganda to purchase
foreign exchange from the market and thus ease some of the pressures on the
exchange rate without increasing reserve money.
The coffee stabilization tax came into force late in 1994. Collections amounted
to US$15 million in fiscal year 1994/95, and US$13 million in 1995/96, the sec-
ond and final year of the boom. Ex post, while the coffee tax revenue did afford
modest room for intervention in the foreign exchange market, much more was
gained through larger savings from general budgetary operations. In the event,
the risks—reasonably perceived ex ante—did not materialize.
change in credit to government). Between the second quarter of 1994 and the
first quarter of 1996, government savings with the Bank of Uganda increased
each quarter as the cash flow system enabled the government to implement a
tighter than budgeted fiscal policy in response to the increased inflation. The
short-term fiscal response also manifests itself in reduced volatility of actual
central bank financing relative to the budget. In addition, from the beginning
Box 3.3. Arguments Against the Coffee Stabilization Tax
While windfall taxation was a reasonable response to the perceived risks the
coffee boom posed for macroeconomic stability, the government’s argument that
it was necessary to reduce exchange rate appreciation during the boom was based
on a misreading of private responses to a temporary income windfall. The in-
crease in coffee prices, triggered by a frost in Brazil, was not a unique event.
Ugandan coffee farmers clearly remembered the previous boom of the late 1970s
and thus would have likely understood that their income gains would be tempo-
rary. Faced with such an income surge, the rational response is to use the money
to boost savings and investment rates. Initially, these savings would be liquid
and then gradually converted into fixed assets over time. In aggregate, the only
liquid asset that the private sector could acquire was claims on the government
in the form of cash, since other financial claims net out. Hence, the coffee boom
would be expected to cause an initially large increase in the demand for real
money balances, followed by a decline and a surge in fixed investment.
The task of the authorities was to accommodate this private sector savings
and investment strategy rather than to nullify it through taxation. Indeed, since
the private sector had not invested in Uganda for more than 20 years, a private
investment boom was socially highly desirable rather than an appropriate ob-
ject for taxation.
As so little revenue was collected by the tax, its effects—good or bad—on
the progress of the boom were marginal. The monetary and real effects of the
windfall proceeded as described above. Initially, the demand for real money
balances increased sharply. Because the Ugandan economy is characterized by
highly flexible prices (a legacy of the demise of long-term contracts under the
stress of volatility), the private sector could achieve desired real money bal-
ances through changes in the price level.
In real terms, private fixed investment rose by 38 percent in the first year of
the boom (from July 1994 to June 1995) and by an additional 17 percent in the
following year. The investment rate out of the private income windfall from the
coffee boom was probably well over 50 percent. Finally, by the early 1990s, Ugan-
dan coffee farmers had below average household incomes (see chapter 4 in this
volume). Hence, as shown in chapter 9, a stronger coffee tax would have been
more regressive, as well as hitting private investment harder. It proved to have
been unnecessary as a stabilization measure, having made only a small contribu-
tion to the significant fiscal savings that were accumulated anyway. It also had the
potential to discourage coffee planting in the long term if coffee farmers antici-
pate that during the next coffee boom the tax will be reintroduced. This was why
it was so critical to remove the tax from the statute book, even though by 1996 the
price of coffee had fallen so that revenue was no longer being generated.
of 1994 the nominal exchange rate appreciated, which was partially countered
by intervention in the foreign exchange market. Reductions in net domestic
assets through tighter fiscal policy were intended to offset the monetary im-
pact of increased net foreign assets.
Figure 3.3. Short-Term Fiscal Response to Increased Inflation, Fiscal

Years 1992/93–1997/98
The producer price of coffee and inflation

Coffee price (U Sh per kilo)
700 0.025
Quarterly inflation (log)

600 0.020
500
400 0.015
300 0.010
200
100 0.005
0 0
1993/94 1994/95 1995/96 1996/97 1997/98
Inflation, budgeted, and actual Bank of Uganda financing

30,000 0.03
Financing (U Sh millions)
Quarterly inflation (log)

0 0
–30,000 –0.03
–60,000 –0.06
1993/94 1994/95 1995/96 1996/97 1997/98
Targets, Tradeoffs, and Costs in Macroeconomic Management

The operation of the cash flow system raises a number of questions. Why
target inflation when implementing the budget rather than the monetary
aggregates that are used to prepare the budget? Why emphasize short-term
fiscal adjustment rather than a more active use of monetary policy? What
were the costs of short-term fiscal adjustments in terms of reduced quality of
public spending?
Inflation Targeting
Inflation was targeted for two reasons. First, prices were flexible and responded
quickly to changes in the money supply. Second, there was a three-month lag
in the compilation of monetary statistics, while the consumer price index was
available at the end of each month. Taken together, this meant that changes in
monetary conditions showed up in prices at about the same time that they
appeared in the statistics for broad money. Table 3.3 shows the rolling time-
table for the compilation of cash flow and the information lags involved in
tracking the implementation of the budget and the evolution of money and
prices. Looking directly at the price data sidestepped the difficulties of sepa-
rating signal from noise in the monetary data, especially for the unpredictable
short-run changes in money demand that are characteristic of a remonetizing
economy like the one in Uganda. Price flexibility is illustrated by inflation
having stopped within one quarter in 1992.
It is not that the demand for money in Uganda is fundamentally different
from most other economies (see Henstridge 1999). Indeed, the long-run stabil-
ity of money demand was central to the financial programming used to con-
struct the budget and in the fiscal program agreed with the IMF. But the use of
a formal money demand relationship in short-term macroeconomic manage-
ment was difficult for two reasons. First, the demand for money relationships
estimated for Uganda used quarterly data, which were not available quickly
enough to be incorporated into the analysis behind short-term adjustments.
Because many of the data were produced with a long lag, the breadth of as-
sumptions that would have to be made in order to project money demand
were more likely to be hostages to fortune than accurate inputs into short-term
policy decisions. Second, in a shock prone, flexible price economy that was in
the process of remonetizing, there were unpredictable short-term shifts in
money demand. Even if the path of real money balances were to be convinc-
ingly projected on a quarterly basis, a judgment on whether monthly fluctua-
tions in monetary conditions are out of line with the quarterly projections would
still have to be made. The most timely and reliable data to inform such a judg-
ment would come from current inflation, which therefore might as well be
targeted directly. Trying to follow a short-term monetary program would largely
have consisted of trying to work out why there was price stability when the
program appeared to be off-track. Indeed, the Bank of Uganda’s experience
with a reserve money program, which is predicated on a stable relationship
between the monetary base and broad money, has found that the remonetization
of the economy and increasing confidence in financial instruments has made it
difficult to sustain the assumption of a stable money multiplier. With wild fluc-
tuations observed in the multiplier, the central bank relies on a broad range of
indicators of monetary conditions, including the excess reserves held by com-
mercial banks and the trends in the discount rates on treasury bills.
Short-Term Fiscal Adjustment versus Monetary Policy

This chapter has emphasized the role of the cash flow system and short-term
fiscal adjustments in the implementation of macroeconomic policy. Fiscal
adjustment both reduced demand directly and led to a reduction in credit to
the government and, therefore, to a reduction in net domestic assets and base
money. Fiscal adjustments were made because the scope for independent
monetary policy has been too limited, even though the budgets have been
consistent with macroeconomic stability since 1992.
Two monetary policy instruments were available: changing the reserve
requirements of commercial banks and issuing treasury bills. In addition,
the Bank of Uganda retained control of the rediscount rate when interest
rates were liberalized. However, in an uncompetitive, segmented commer-
cial banking sector with excess liquidity, changes in the rediscount rate had
little bite. Changing the banks’ reserve requirements would, in principle,
reduce lending at the margin, and hence lower net domestic assets and
money in the economy. The central bank was unwilling, however, to change
reserve requirements, because several of the smaller commercial banks were
too fragile to comply without becoming bankrupt. While the argument
against active use of reserve requirements might have been reasonable with
regard to the immediate stability of the financial sector, it neutered one
instrument of monetary policy.
What remained was the treasury bill. However, the government’s judg-
ment was that a short-term fiscal adjustment provided more monetary bite—
both through a reduction in base money and a reduction in aggregate de-
mand—for a given shilling cost, than did increased issues of treasury bills.
The volume of sales of treasury bills in the primary auction managed by
the Bank of Uganda was not determined by the government’s financing re-
quirements. Since June 1992, the government has set budgets with no planned
increase in domestic borrowing. The main reason for these sales was to de-
velop a capital market, specifically a secondary market in treasury bills, within
which the Bank of Uganda could conduct open market operations. Until 1996/
97, however, there had been virtually no secondary trading of treasury bills.
Banks held the bulk of outstanding bills (83 percent of a total of U Sh 88
billion in June 1997), so the treasury bill as an instrument of monetary policy
was limited to its influence on the composition of the banking system’s as-
sets. Many commercial banks held large cash reserves because they were
underlent and had a strong liquidity preference. The net effect of additional
sales of treasury bills on banks’ liquidity depended on whether any of these
excess reserves would have gone into increased lending instead of additional
treasury bills. If so, then there was some dampening of liquidity. This damp-
ening was unlikely, however, because the reasons why banks had excess re-
serves in the first place had not changed. From a commercial bank’s perspec-
tive, lending to the private sector was much like an equity investment, because
audits had little credibility, making systematic risk assessment difficult; and
foreclosure or loan recovery through the courts was difficult, if not impos-
sible. If, for these reasons, additional treasury bills did not substitute for lend-
ing, then sales in the primary auction served as substitutes for otherwise
unremunerated excess reserves, and had no impact on monetary conditions—
a classic liquidity trap.
The banks also held excess reserves because of a strong liquidity prefer-
ence in the absence of an interbank or overnight market. Beyond the point
where additional treasury bills served to remunerate excess reserves, banks
required sharply higher interest rates to compensate for the increased risk of
reduced liquidity. As a result, increased primary issues of treasury bills be-
yond the point where they started to have a monetary impact led to a sharply
higher interest cost for the government budget. As mentioned before, in the
government’s view a short-term fiscal adjustment provided more monetary

bite for a given shilling cost than did increased issues of treasury bills. Hence,
fiscal adjustment was the preferred instrument of short-term management.
Largely as a result of a combination of macroeconomic stability and im-
provements in financial oversight and bank supervision, financial markets
in Uganda have become more sophisticated in recent years. The level of
monetization (the ratio of broad money to GDP) increased to 13 percent of
GDP in 1998, compared with 10 percent in 1994. Financial savings as a ratio
to GDP increased to 35 percent in 1998, compared with 27 percent in 1994.
The ratio of the outstanding stock of treasury bills to broad money is 23
percent, compared with 11 percent in 1994, and bank holdings of excess
reserves have been reduced. These developments have increased the po-
tency of monetary policy and strengthened the link between the foreign
exchange market and the domestic financial markets. During an episode of
sharp depreciation in 1999, the central bank tightened monetary conditions
using indirect monetary instruments (the rediscount rate and issues of trea-
sury bills) with some success.
Costs of Budget Discipline

Making within-year adjustments to the releases of funds clearly disrupts
original spending plans, partly because it increases volatility, and—argu-
ably more seriously—because it weakens the budget as the instrument for
allocating public resources.14 These are common objections to the use of
spending cuts in implementing macroeconomic policy and to the use of
cash budgets.
However, the extent to which the use of the cash flow system for macro-
economic management can be blamed for the costs is limited. Ministries could
face within-year cuts to their approved budgets for two reasons. In one case,
they may need to cut aggregate total spending to make up for a shortfall in
the resource envelope. In another, they might need to cut one ministry’s bud-
get to accommodate extra spending by another ministry to keep total spend-
ing under control. The accommodation of powerful ministries’ overspend-
ing—usually those close to the president—accounted for two-thirds of the
variation between the budgeted allocations for each ministry and the even-
tual out-turn between 1992 and 1997 (Moon 1997). The cash flow system was
not responsible for the prevalence or persistence of demands for supplemen-
tary spending—indeed, Stasavage and Moyo (1999) argue that such ill-disci-
pline was at least as rampant prior to the adoption of the cash flow system—
and in fact, it was essential for containing the damage. The combination of
14. Although assessing the microeconomic costs would be difficult, such assess-
ments could strengthen the apparently weak connection between the release of funds
and the achievement of the desired delivery of public services at the facility level (see
chapter 11 in this volume).
resource-constrained budgeting ex ante and its implementation ex post us-

ing cash flow simply made abysmal budget discipline more obvious. The
public spending program most frequently suffered from unexpected cuts
because supplementary expenditures were approved, rather than as a result
of the operation of cash flow per se.
Furthermore, when the loss of expenditure control results in sharply in-
creased inflation, the real purchasing power of the cash allocations in the
original budget would be diminished anyway. Therefore, cutting nominal
allocations to control inflation may not be as costly for spending programs as
it first appears.
In any case, the appropriate tradeoff between the costs and benefits of mak-
ing expenditure cuts should extend beyond the confines of the government’s
expenditure program, across the entire economy. If the government decides
not to cut expenditure, the benefits to spending ministries of receiving their
nominal allocations—despite increased inflation—and the benefits to the in-
tegrity of the budget process have to be weighed against the costs of the in-
creased inflation to the private sector. The indicators shown in table 3.1 imply
that these costs would have been large. The impact on expenditures for social
programs that would help reduce poverty (such as health and education) was
minimized by designating this spending as “priority program area” expendi-
tures, which would not be subject to cuts. In effect, protecting the priority pro-
gram areas from cuts was equivalent to a contingent decision on which items
would be hit if, or in most years when, budget discipline broke down.
As mentioned previously, a drawback of using intrayear adjustment of
spending was that the cash flow system imposed discipline on the total bud-
get aggregates, which undermined the budget formulation process as some
ministries became increasingly skeptical whether their allocations, approved
by parliament, would survive the first few months of supplementaries. Evi-
dently, the solution to this problem is not to relax fiscal policy, but to strengthen
budget discipline through political will.15
Commitments and Arrears

Achieving restraint through control of cash spending does not prevent an
accumulation of commitments to spend. If, in the face of a commitment to
spend, the cash for payment is not released, the spending has not been cut,
it has instead been financed by the accumulation of arrears. As well as dis-
torting the allocation of public resources, the accumulation of arrears can
also lead to inflated contracts, as suppliers factor into their prices the likely
delay in payment as well as a premium for the risk of not getting paid at
all. A system of local letters of credit was set up to prevent suppliers from
15. The costs of poor budget discipline had been a feature of the BFP since 1995/
96. From 1997/98 onward, improvements in discipline have been addressed directly
in the BFP as part of the process of compiling the budget.
contracting to deliver or actually delivering goods and services unless the

means of payment had been earmarked in a government account at the
Bank of Uganda. This system did not prevent arrears from accumulating to
a total of about U Sh 260 billion by 1999 (28 percent of domestic revenue),
partly due to a cumbersome system, but mainly because suppliers appeared
willing to risk delayed payment.
In 1997 it was established that no commitment was valid unless approved
by the Ministry of Finance. In 1999/2000 a new system of commitment con-
trol was implemented (with technical support from the IMF) across all cen-
tral government spending agencies for nonwage expenditures. As a result,
overcommitments have been sharply reduced. During the first two quarters
of 1999/2000, overcommitments are estimated to have totaled only U Sh 6.4
billion, compared with an annual accumulation of domestic arrears of more
than U Sh 100 billion, on average, over the previous three years.
Conclusions
The essential foundations both for the subsequent reforms and the resur-
gence of growth and decline in poverty were the legalization of the parallel
market for foreign exchange and the achievement of macroeconomic stabil-
ity. These reforms originated not from conditions imposed by the World Bank
or the IMF, but from within the government.
The debate about the exchange rate in 1989 and 1990, as well as the con-
trasting views on the gains from low inflation prior to 1992, show that the
NRM government was not a monolith. A monolithic model of government
cannot account for the shift away from the early experiment with revival of
the control economy and revaluation in 1986/87. Once the debate on the di-
rection of the exchange rate was settled by the early 1990s, reforms were
profound and decisive.
A perhaps unusual, but effective, approach to stabilization combined a
resource-constrained budget and its implementation through a monthly cash
flow system. The latter gave the government the ability to respond to shocks
and ensure that the intended outcome of low inflation was indeed achieved.
The cash flow approach used in Uganda has proved more flexible and rela-
tively less costly than the monthly cash budget used, for example, in Tanza-
nia and Zambia. The cash flow system enabled annual budget implementa-
tion to be more flexibly adjusted to keep inflation low in response to changing
macroeconomic conditions, a shortfall in revenue, or within-year demands
for extra spending from some parts of the government.
Targeting inflation through short-term fiscal adjustment, however, in-
volved some tradeoffs and costs. First, the demand for additional spending
within the budget year confronted the Ministry of Finance with a tradeoff
between preserving the budget aggregates and preserving the original bud-
get allocations to other ministries. The resolution of this dilemma was clear:
the aggregates—and macroeconomic stability—were preserved. Although this
decision disrupted some expenditure programs, the costs to the spending

programs were clearly outweighed by the benefits of low inflation to the rest
of the economy. This chapter argues that poor budget discipline—rather than
the cash flow system that was used to manage the budget—is mostly respon-
sible for the disruption in the spending programs.
Second, in planning fiscal policy, particularly during the period of high
coffee prices and increased foreign inflows in the mid-1990s, the increased
donor financing of the budget and the desire to contain an appreciation of
the exchange rate posed another tradeoff. The Bank of Uganda had to bal-
ance the intervention in the foreign exchange market to contain the nominal
appreciation against the fiscal adjustment needed to keep the domestic price
level stable (and thereby avoid a real appreciation). This tradeoff was man-
aged by maintaining the target of low inflation as the primary objective.
Drawbacks to a reliance on short-term fiscal adjustments include—in
addition to the disruption to spending programs—the potential for accu-
mulation of domestic arrears. However, tackling both budget discipline and
arrears will become easier as the constraints that led to the adoption of a
cash flow system in the first place—the limited scope for independent mon-
etary policy and the strong likelihood of shocks—ease, and the horizon
over which policy is implemented can stretch over periods longer than a
month or a quarter.
The conclusion that cash flow was a vital part of the maintenance of mac-
roeconomic stability in Uganda echoes Treasury Secretary Tumusiime-
Mutebile’s (1998) contention that “The Budget Framework Process and cash
flow have been the two most important technical instruments in maintain-
ing stability since 1992.” Economic conditions in Uganda since 1992, includ-
ing liberalized, flexible prices, thin or nonexistent financial markets, trade
shocks, and flows of foreign capital, supported the use of the cash flow sys-
tem as part of macroeconomic management. Moreover, Honohan and
O’Connell’s (1997) review of the development of monetary regimes across
Africa over the last 30 years shows a trend toward such conditions across
the continent. They conclude that greater fiscal restraint is needed to make
the transition toward a more open and flexible economy, which, in turn,
exacerbate problems of policy credibility and macroeconomic management.
To the extent that Uganda’s monetary conditions exist elsewhere, its suc-
cessful experience with macroeconomic management may be a relevant
model for other countries as well.
References
Adam, Christopher S., and David L. Bevan. 1997. “Fiscal Restraint and the
Cash Budget in Zambia.” University of Oxford, Centre for the Study
of African Economies, U.K. Processed.
Bevan, David L. 1998. “Uganda Public Expenditure Review: Macroeconomic

Options in the Medium Term.” University of Oxford, St. John’s Col-
lege, U.K. Processed.
Bevan, David L., Paul Collier, and Jan-Willem Gunning. 1989. Peasants and
Governments: An Economic Analysis. Oxford, U.K.: Clarendon Press.
_____. 1990. Controlled Open Economies: A Neoclassical Approach to Structural-
ism. Oxford, U.K.: Clarendon Press.
Collier, Paul, and Jan-Willem Gunning. 1996. “Policy Towards Commodity
Shocks in Developing Countries.” Working Paper no. 96/84. Interna-
tional Monetary Fund, Washington, D.C.
Henstridge, Mark. 1997. “Implementing Fiscal Adjustment: Uganda’s Cash
Flow.” University of Oxford, Centre for the Study of African Econo-
mies, U.K. Processed.
_____. 1999. “De-monetization, Inflation, and Coffee: The Demand for Money
in Uganda.” Journal of African Economies 8(3): 345–85.
_____. Forthcoming. “Fiscal Management and Macroeconomic Stability in
Uganda.” Working paper. International Monetary Fund, Washington, D.C.
Honohan, Patrick, and Stephen A. O’Connell. 1997. “Contrasting Monetary
Regimes in Africa.” Working Paper no. 97/64. International Monetary
Fund, Washington, D.C.
Kasekende, Louis A., and Moazzam Malik. 1994. “Dual Exchange Regimes,
Unification, and Development: The Case of Uganda.” Paper presented
at the Conference on Adjustment and Poverty in Sub-Saharan Africa,
March, Accra, Ghana.
Kasekende, Louis A., and Germina Ssemogerere. 1994. “Exchange Rate Uni-
fication and Economic Development: The Case of Uganda, 1987–92.”
World Development 22(8): 1183–98.
Kasekende, Louis A., Damoni Kitabire, and Matthew Martin. 1996. “Capital
Inflows and Macroeconomic Policy in Sub-Saharan Africa.” In Inter-
national Monetary and Financial Issues for the 1990s, vol. 8. New York:
United Nations.
Kharas, Homi, and Brian Pinto. 1989. “Exchange Rate Rules, Black Market
Premia, and Fiscal Deficits: The Bolivian Hyperinflation.” Review of
Economic Studies 56(3): 435–47.
Lizondo, José Saúl. 1987. “Unification of Dual Exchange Markets.” Journal of
International Economics 22: 57–77.
Moon, Allister J. 1997. “Uganda’s Budget Framework: Presentation to the
Parliament of Uganda.” Uganda Public Expenditure Review FY 97/
98. World Bank, Washington, D.C. Processed.
Morris, Stephen. 1989a. “Macroeconomic Features of the Uganda Economy

and Some Policy Implications. Part One: The Relationship between
Money Prices and the Parallel Market Exchange Rate.” Discussion
Paper no. 1. Ministry of Planning and Economic Development,
Kampala.
_____. 1989b. “Macroeconomic Features of the Ugandan Economy and Some
Policy Implications. Part Two: The Impact of Official Exchange Rate
Devaluation on Uganda.” Discussion Paper no. 2. Ministry of Plan-
ning and Economic Development, Kampala.
_____. 1995. “Inflation Dynamics and the Parallel Market for Foreign Ex-
change.” Journal of Development Economics 46: 295–316.
Obbo, Sam, and John Baptist Waswa. 1992 “Budget aims at 15 Percent Infla-
tion.” The New Vision 7(154): 1–16.
Pinto, Brian. 1988. “Black Markets for Foreign Exchange, Real Exchange Rates,
and Inflation: Overnight Versus Gradual Reform.” Policy Research
Working Paper no. 84. World Bank, Development Research Group,
Washington, D.C.
_____. 1989. “Black Market Premia, Exchange Rate Unification, and Inflation
in Sub-Saharan Africa.” World Bank Economic Review 3(3): 321–38.
Republic of Uganda. 1992. “The ‘Way Forward I.’ Macroeconomic Strategy,
1990–1995.” Ministry of Planning and Economic Development,
Kampala.
_____. 2000. “Poverty Eradication Action Plan. Second Draft.” Ministry of
Finance, Planning and Economic Development, Kampala.
_____. Various years. “Background to the Budget.” Ministry of Finance, Plan-
ning and Economic Development. Kampala.
Stasavage, David, and Dambisa Moyo. 1999. “Are Cash Budgets a Cure for
Excess Fiscal Deficits (and at What Cost)?” Working paper no. 99.11.
University of Oxford Centre for the Study of African Economies, U.K.
Tumusiime-Mutebile, Emmanuel. 1998. “Opening the Budget to Stakehold-
ers: Use of MTEF/PER Process as a Catalyst for Enhanced Account-
ability.” Paper presented at the Budget Process and Foreign Aid Work-
shop, November, World Bank, Washington, D.C. Processed.
_____. 1999. “Uganda’s Experience with the Medium-Term Expenditure
Framework.” Ministry of Finance, Planning and Economic Develop-
ment, Kampala. Processed.
Part II
Household Responses and Constraints

4
Changes in Poverty and Inequality

Simon Appleton
According to macroeconomic data, Uganda in the 1990s was a rare economic

success story in Sub-Saharan Africa. However, it has been questioned whether
the growth recorded in official statistics was reflected in rising living stan-
dards, particularly for the poor. This concern was, for example, voiced in the
1997 Human Development Report: “The perennial concern is that the benefits
of strong growth have yet to translate into measurable improvements in the
standard of living for the majority of people” (UNDP 1997, p. 2).
Widespread concern about unchanging poverty levels is also reflected in
the report from the Uganda Participatory Poverty Assessment Project
(UPPAP), a major attempt by the Ugandan government to consult the people
and hear “the voices of the poor.” A summary of UPPAP’s major findings
based on seven districts concluded: “Through analysis of long-term trends
in poverty, many local people felt that poverty was worsening in their
communities…Local people reported more movement into poverty than out
of it” (Republic of Uganda 1999, p. 10).
Given these perceptions one might question whether the growth appar-
ent in the national accounts led to substantial reductions in poverty. Aside
from household surveys, national accounts can draw upon little hard informa-
tion on incomes from nonexport agriculture and informal sector activities,
Uganda’s most important income sources. Moreover, national accounts tell us
nothing about how incomes are distributed.
The author is grateful to the Ugandan Bureau of Statistics for access to the
data. Tom Emwanu, Johnson Kagugube, Margaret Kakande, and James Muwonge
helped with some of the analysis. In addition to the editors of this volume, Lionel
Demery, Jesko Hentschel, John Mackinnon, Francis Teal, and participants in a semi-
nar at the University of Oxford provided valuable comments.
83
84 Simon Appleton
Fortunately, Uganda is one of the few Sub-Saharan countries that can con-
vincingly address the question of what happened to poverty—as measured by
private consumption—in the 1990s. This is because of a large-scale household
survey program that began in 1992 with the integrated household survey (IHS).
This baseline survey was followed by four monitoring surveys (MS-1, MS-2,
MS-3, and MS-4) designed to monitor living standards on virtually an annual
basis. The surveys have large samples—typically 5,000 households—but are
particularly impressive in the number of communities sampled, typically 500.
The surveys are designed to be nationally representative, although a few inse-
cure areas were excluded (see appendix A at the end of the book for details).
All five surveys rely on similar sampling procedures and questionnaires (see
annex 4.1 for further details on the surveys and the adjustments needed to
compare real private consumption over time).1
This chapter uses the household data from these surveys to estimate changes
in average living standards, poverty, and inequality from 1992 to 1997/98.2
During this period, the growth in mean consumption per capita estimated from
the household surveys matches that reported in the national accounts. More-
over, at all points of the income distribution, households are better off in 1998
than 1992. This implies that—regardless of where the poverty line is set—
poverty was reduced in the period. Indeed, at the lower points of the income
distribution, living standards grew more than at the mean. Consequently, in-
equality was reduced. Both overall growth and falling inequality contributed
1. An earlier attempt to compare the IHS with an earlier survey, the household
budget survey (HBS) of 1989, was unsuccessful (Appleton 1996). The HBS was reana-
lyzed as part of the preparation for this chapter, but still produced apparently incom-
parable results with the IHS and the monitoring surveys. Consumption in the HBS
appears too high relative to the subsequent surveys. Appleton (1996) suggested that
the incomparability arose from questionnaire design problems with the IHS. How-
ever, this suggestion appears less plausible given the evidence in this chapter of the
comparability of the IHS results and those from the monitoring surveys. These moni-
toring surveys were not subject to the same supposed problems of questionnaire de-
sign as was the IHS. Sampling problems with the HBS may be a more likely explana-
tion for the incomparability of results. Mean household size was one person higher in
the HBS than in the census of 1991 and the subsequent household surveys.
2. This analysis complements the poverty study carried out using the surveys
conducted by the government’s Coordination of Poverty Eradication Project and
Department of Statistics (Republic of Uganda 1997b). The earlier study was conducted
before the release of the third and fourth monitoring surveys and used a poverty line
defined as two-thirds of mean consumption per adult equivalent in the IHS. This
chapter derives a poverty line based on calorie requirements and updates the analy-
sis. It also includes some additional adjustments to ensure comparability of the con-
sumption data, together with some further decompositions of interest. Note, how-
ever, that the two studies, despite rather different methods, agree on the general
direction of poverty trends in Uganda during the period.
Changes in Poverty and Inequality 85
to poverty reduction, although growth in incomes contributed the most. That

is not to say that some households did not became poorer during the period,
just that such adverse movements were more than offset by other households
escaping poverty. We derive an absolute poverty line for 1992 that defines
around 56 percent of the population as poor (figure 4.1). By 1997/98, this pro-
portion had fallen to 44 percent. Clearly, this is a substantial poverty reduc-
tion—more than 20 percent in just five years. The reduction in poverty was
neither uniform across all regions, nor the same each year. Poverty fell most in
the central region and least in the eastern region. Poverty reduction was most
marked at the beginning and at the end of the period, with no gains for the
poorest indicated during the first three monitoring surveys (1993/94 to 1995/
96). However, poverty did fall in every region between 1992 and 1997/98; na-
tionally, it also fell between every survey.
An apparent discrepancy exists between the findings from the house-
hold surveys and the perceptions of increased poverty as reported in the
UPPAP and more widely in Uganda. It should be noted that the UPPAP
uses a wider concept of poverty. This concept goes beyond the private con-
sumption measured in the household surveys and includes insecurity and
poor government services. Security is better than in the early 1980s, but the
situation deteriorated in parts of the country during the household survey
periods, as shown by the increasing number of districts excluded from the
Figure 4.1. Poverty in Uganda, 1992 and 1997/98
80
60
Percent poor
40
20
0
National Rural Urban Central Western Eastern Northern
1992 1997/98
Source: Author’s calculations.

86 Simon Appleton
sample during the course of the program. For public services, evidence ex-
ists—for example, from the Ugandan school surveys of 1996 and 2000—of
an improvement, although the level of provision still remains poor. As dis-
cussed elsewhere in this volume, the universal primary education initia-
tive of 1997 dramatically widened access to education, although perhaps at
some cost to quality. The spread of AIDS constitutes a grave threat to health,
although there is some evidence of falling child mortality based on the
Demographic and Health Surveys of 1988 and 1995.
Aside from the differing conceptions of poverty, other methodological
issues might explain the apparent discrepancy between the qualitative and
quantitative evidence. One is a possible difference in the time horizon. In
part, perceptions of increasing poverty may refer to trends over a longer time
horizon than the five-year interval covered by the household surveys.3 More-
over, the UPPAP report had the difficult task of drawing general conclusions
about poverty trends based on a mass of qualitative data. As already stated,
the time trend analysis for the Iboa community tried to quantify eight factors
related to poverty for seven time periods. This must be combined with simi-
larly disaggregated data for the other 35 communities. It seems doubtful that
the UPPAP attempted a quantitative aggregation of this disparate data and,
indeed, at times the conclusions seem to sacrifice rigor for comprehensive-
ness. Moreover, as far as can be ascertained, the time trend analysis in the
UPPAP provides no information about distribution within communities. The
eight factors identified as related to poverty in the Iboa community—such as
food availability or access to health services—appear to pertain to the com-
munity as a whole and not specifically to its poorer members. More work
3. In the UPPAP, time trend analysis was done in five-year intervals, often start-
ing in 1970–74 and going through to 1995–99. For each five-year interval, members of
local communities placed pebbles to quantify indicators or causes of poverty. For
example, in the time trend diagram illustrated in the UPPAP report, the chosen com-
munity (Iboa in the Moyo district) placed 10 stones for food availability in 1970–74
and only 4 for food availability in 1995–99 (Republic of Uganda 1999, figure 2.5). This
suggests a perception of greatly increasing poverty over the long term. However, for
the subperiod covered by the surveys, food availability is reported not to deterio-
rate—remaining at four stones throughout the 1990s (up from one stone in 1985–
89)—and community assessments for 2000 and beyond are relatively optimistic (eight
stones). Food availability is just one of eight factors presented in the illustrative time
trend diagram. However, for most of the other factors, there is no deterioration be-
tween 1990–94 and 1995–99; indeed there is substantial improvement in most factors
compared with 1985–89. The illustration of the time trend analysis for the Iboa com-
munity raises questions about the conclusion of the UPPAP report that there was
increasing poverty in the Moyo district. The Iboa community was one of probably
only four communities visited by UPPAP in Moyo (36 communities were visited from
9 districts). However, the time trend analysis presented for the Iboa community pro-
vides no indication that poverty was increasing in the district in the 1990s.
needs to be done to reconcile the findings of the UPPAP and the survey data.
At this stage, the extent to which there is a genuine contradiction is not clear,
still less whether the UPPAP’s analysis of poverty trends is to be preferred.
The remainder of this chapter is organized as follows. First, it outlines the
growth in mean consumption per capita as reported by the household sur-
veys between 1992 and 1997/98 and shows this growth to be close to that
estimated in the national accounts. It then derives an absolute poverty line
for Uganda and uses it to show the substantial reduction in poverty during
the surveys. Falls in inequality are also documented, although they are shown
to explain only a small part of the reduction in poverty relative to general
economic growth. Poverty reduction is decomposed by economic sectors,
with the cash crop sector shown to account for more than half of the fall in
poverty. The chapter ends by summarizing the main results. Those inter-
ested in the methodological details of the analysis should refer to annex 4.1.
Changes in Mean Consumption Per Capita

The focus of this chapter is household private consumption per capita as a
measure of individual welfare. This is not to deny that other dimensions of
well-being are important. However, private consumption—including consump-
tion of home-produced food—is a central indicator of economic welfare. We
do not address the issue of intrahousehold allocation, but see Appleton, Chessa,
and Hoddinott (1999) for suggestive evidence of boy-girl discrimination based
on the same data. We adjust the consumption figures reported in the house-
hold surveys in a number of ways detailed in annex 4.1, perhaps the most
important being to take account of regional differences in food prices. After
the adjustments, the household surveys imply that real consumption per capita
rose by 16.5 percent between 1992 and 1997/98 (see table 4.1). For both rural
and urban areas separately, the rise was slightly less, measuring 15.9 and 11.4
percent, respectively. This discrepancy between the national and disaggregated
figures can be explained by the increase in the estimate of the relative size of
the urban population from 12.4 percent in the IHS to 13.3 percent in MS-4. The
overall rise in mean consumption in the bottom line, fully adjusted figures is
not driven by the adjustments to the data. Indeed, the adjustments lead to a
downward revision of the growth implied in the unadjusted figures.
The average growth in mean consumption per capita from the first to last
household survey is close to that estimated in the national accounts.4 Making
precise comparisons is hard, because the national accounts data are reported
in fiscal years (July to June), whereas the IHS and MS-4 covered something
closer to calendar years (see book appendix A). The surveys from the IHS to
4. Note that the figures in table 4.1 differ from constant price consumption as
reported in the national accounts, because they use the consumer price index rather
than gross domestic product deflator.
88 Simon Appleton
Table 4.1. Estimates of Private Consumption Per Capita
National accounts
Nominal Real Percentage
Fiscal year (U Sh/month) (1989 U Sh prices) growth (real)
1991/92 12,094 6,205 n.a.
1992/93 16,167 6,380 2.8
1993/94 16,949 6,275 –1.6
1994/95 19,824 6,917 10.2
1995/96 22,151 7,192 4.0
1996/97 24,070 7,243 0.7
1997/98 26,067 7,414 2.4
Household surveys (U Sh per month, 1989 prices)

Year National Rural Urban
IHS (1992) 5,452 4,735 10,752
MS-1 (1993/94) 5,718 4,862 11,645
MS-2 (1994/95) 6,058 5,206 12,067
MS-3 (1995/96) 6,187 5,242 12,246
MS-4 (1997/98) 6,353 5,488 11,979
n.a. Not applicable.
Note: National accounts data are in fiscal years (July 1–June 30). Real consumption is obtained
using the consumer price index as a deflator.
Source: Author’s calculations based on household survey data; national accounts data from
the Uganda Bureau of Statistics.
MS-4 span an interval of almost exactly five years, with the mid-points of both
surveys falling around August. However, in the five-year interval from fiscal
year 1992/93 to fiscal 1997/98, real private consumption per capita in the na-
tional accounts rose by 16.1 percent. These figures are remarkably close to the
16.5 percent figure derived from the household surveys. The two estimates
may not be strictly independent, because the household survey data were one
source used in estimating consumption in the national accounts. However,
some of the monitoring surveys may not have been used for the national ac-
counts estimates, as there was a substantial lag in cleaning the data and writ-
ing the official survey reports. Moreover, both the level of consumption and
the patterns of year-on-year changes were different in the macro and micro
data. The household surveys reported substantially lower levels of private con-
sumption than did the national accounts: in some cases, the discrepancy is
almost a third. The household survey data also showed a smoother pattern of
growth than did the macro figures. Mean consumption per capita rose strongly
between each survey: by 4.9 percent between IHS and MS-1, by 5.9 percent
between MS-1 and MS-2, by 2.1 percent between MS-2 and MS-3, and by 2.7
percent between MS-3 and MS-4. The phasing of the increases in consumption
over the five years was very different for urban and rural areas. In line with the
national pattern, living standards in rural areas grew fairly steadily between
each survey. In urban areas, most of the growth in the period occurred be-
tween 1992 and 1993/4, when real consumption per capita rose by 8.3 percent.
In summary, the household surveys broadly corroborated the improve-
ment in living standards recorded in the national accounts. One new piece of
information they provided was the rural-urban breakdown. In particular,
they showed that rural areas enjoyed growth comparable to that experienced
in urban areas. However, the discussion so far has been in terms of develop-
ments at the mean. To measure the reduction in poverty, we need to go fur-
ther, beginning with setting a poverty line.
Defining an Absolute Poverty Line for Uganda

Uganda currently does not have an officially approved poverty line.5 This
section constructs an absolute poverty line, reflecting the monetary cost of
meeting certain basic needs. When using a poverty line to evaluate improve-
ments in living standards of the poor over time, it is desirable to fix the pov-
erty line in real terms. If the poverty line is made relative and allowed to rise
with improvements in general living standards, then it is possible that pov-
erty will rise despite improvement in the living standards of the poor. While
such an increase in relative poverty may be interesting, our focus in this chap-
ter is on whether poorer people have become materially better off. This is not
to deny that poverty ultimately has an important relative aspect and that
countries may want to set higher poverty lines as they become more affluent.
However, for the relatively short period analyzed here, this does not seem to
be a relevant issue.
We set the poverty line by following the approach of Ravallion and Bidani
(1994). Further information on the derivation of the line is in annex 4.1. Here
5. Kikafunda, Serunjogi, and Migadde (1992) have estimated a nutrition-based

absolute poverty line for Uganda using the 1989/90 HBS. They arrive at a figure of U
Sh 6,745 per month per person. This is somewhat higher than the estimate in this
chapter of U Sh 6,252 (1989 prices) per adult equivalent per month. The use of the
HBS, which excludes much of the north region and has higher consumption esti-
mates, may partially account for the discrepancy. There are also differences in method:
Kikafunda, Serunjogi, and Migadde (1992) used regional food baskets and appear to
have allowed for heavy levels of meat consumption. In the western rural and many
other areas, their baskets allow the poor to eat 64 percent as much meat (in kilo-
grams) as matooke (plantain) (see table 7, p.38). By contrast, in this chapter, the ratio of
meat to matooke weights in the food basket is 1.6 percent.
90 Simon Appleton
we provide merely an overview. Note that a large degree of judgment is in-

volved in setting a poverty line. Consequently, one should not attach too
much importance to the estimates we derive for the level of poverty in any
single year or place. Instead, attention should be focused on poverty com-
parisons, and indeed, on whether they are robust with regard to setting the
poverty line. In common with most of the literature, the Ravallion and Bidani
approach focuses on defining food-related needs and only indirectly esti-
mates nonfood requirements. Specifically, it first defines a food poverty line
based on the cost of obtaining sufficient calories given the typical food bas-
ket of the poor. This approach contains an element of circularity, as one does
not know which people are poor before the poverty line has been set. How-
ever, in the case of Uganda, we focused on the food-basket of the poorest 50
percent of the population, because previous studies using similar methods
had identified around half of the population as poor (Republic of Uganda
1996). We initially focus on the cost of obtaining 3,000 calories, which roughly
corresponds to the energy requirements of male subsistence farmers accord-
ing to the principles set by the World Health Organization (WHO 1985). Table
4.2 shows the derivation of the food poverty line, defined as the cost of ob-
taining 3,000 calories, using the food basket of the poorest 50 percent of the
population in the first monitoring survey (MS-1). The food basket is valued
in constant prices, namely, the median food prices reported in the survey. In
practice, food prices differ between regions, and this variation implies differ-
ent food poverty lines in nominal prices (see table 4.3).
Under the Ravallion and Bidani approach, nonfood requirements are es-
timated as the nonfood spending of households whose total consumption is
just equal to the food poverty line. The rationale for using nonfood spending
is that if households are sacrificing the food expenditure needed to meet their
calorie requirements for nonfood spending, then nonfood spending should
also be considered as needed. As the surveys do not provide information
about nonfood prices, we allow nonfood requirements to vary by region and
by rural-urban location. Table 4.3 reports the predicted food share of those
whose total consumption was just equal to the food poverty line in various
locations and the implied total poverty lines. We also report a national aver-
age poverty line, although in the analysis we used the poverty line specific to
the location of the household.
The poverty lines reported in table 4.3 are the expenditures required to
obtain 3,000 calories and meet nonfood requirements. In practice, many house-
hold members do not need 3,000 calories, as calorie requirements vary by age
and by sex. We use equivalence scales to allow for this (see table A4.2). For
example, children are assigned equivalence scales equal to their calorie require-
ments divided by 3,000. This implicitly assumes that children’s nonfood re-
quirements are lower than those of men in the same proportion as their calorie
requirements. For women, such an assumption is less defensible, and instead
we assume that their nonfood needs are the same as men’s. Given these equiva-
lence scales, members of a household are said to be poor when their total con-
sumption per adult equivalent falls below the poverty line.
Table 4.2. Derivation of the Food Poverty Line

(MS-1 prices)
Cost per
month
Quantity (U Sh
(kg per Price Calories/ Retention Calories 1993
Food item month) (U Sh/kg) kg ratio per day prices)
Matooke (plantain) 28.54 67 770 0.50 366 1,903

Sweet potatoes 34.12 63 1,020 0.70 812 2,133
Cassava 9.02 200 2,557 0.89 684 1,804
Irish potatoes 0.36 250 750 0.85 8 89
Rice 0.06 700 3,600 1.00 7 42
Maize (grain) 0.30 400 3,470 0.90 32 121
Maize (flour) 1.54 350 3,540 1.00 181 538
Bread 0.02 1,300 2,490 1.00 1 20
Millet 2.25 300 3,231 0.65 158 676
Sorghum 1.57 200 3,450 0.90 163 314
Beef 0.31 1,100 2,340 0.80 19 339
Other meat 0.05 1,000 2,340 0.75 3 52
Chicken 0.09 1,167 1,460 0.61 3 111
Fresh fish 0.62 467 1,030 0.60 13 290
Smoked fish 0.39 583 3,005 0.70 28 229
Eggs 0.00 2,000 1,490 0.88 0 8
Milk 0.55 400 640 1.00 12 219
Cooking oil/ghee 0.06 1,400 8,570 1.00 18 89
Passion fruit 0.10 382 920 0.75 2 37
Sweet bananas 2.34 50 1,160 0.56 51 117
Tomatoes 0.70 192 200 0.95 4 134
Cabbages 0.33 125 230 0.78 2 41
Beans (fresh) 0.73 400 1,040 0.75 19 292
Beans (dry) 2.86 350 3,300 0.75 236 1,002
Groundnuts 0.59 600 2,350 0.93 43 355
Sim-sim 0.45 222 5,930 1.00 89 100
Sugar 0.35 1,000 3,750 1.00 44 352
Total 3,000 11,463
Source: Author’s calculations using data from MS-1 provided by the Uganda Bureau of
Statistics.
Poverty Trends
Tables 4.4 to 4.8 present the poverty statistics for the five surveys (see an-
nex 4.1 for definitions). Data are disaggregated by location, both by urban-
rural and by the four regions of the country. Along with the poverty statis-
tics, we report the percentage of people in each location and their mean
household consumption per adult equivalent. We also report the contribu-
tion each location makes to each poverty statistic (that is, what percentage
92 Simon Appleton
Table 4.3. Poverty Lines

(1993 prices)
Predicted Poverty line Food poverty Poverty line

Region food share (constant prices) line (nominal) (nominal)
Central rural 0.609 15,947 13,971 19,435

Central urban 0.490 17,314 14,837 22,409
Eastern rural 0.653 15,446 8,832 11,900
Eastern urban 0.557 16,548 11,300 16,312
Western rural 0.675 15,189 8,209 10,877
Western urban 0.589 16,174 9,245 13,043
Northern rural 0.638 15,610 8,410 11,452
Northern urban 0.578 16,304 9,433 13,417
National (average) 0.566 16,443 11,463 16,443
Note: Nominal and national lines are shown for information only and are not used in the
analysis.
Source: Author’s calculations using data from MS-1 provided by the Uganda Bureau of
Statistics.
of national poverty is attributable to each location). Given that poverty sta-

tistics are estimates, it is useful to test whether changes in their values are
statistically significant (Kakwani 1993). We report tests of the significance
of the changes in the poverty statistics between IHS and MS-4 in table 4.9.
We report three types of poverty statistics, termed P0, P1, and P2. All three
statistics are from the so-called Pα or Foster, Greer, and Thorbecke (1984)
class of indicators. The P0 statistic is simply the proportion of Ugandans esti-
mated to live below the poverty line. In the first survey, the IHS, the propor-
tion was 56 percent. This statistic shows that absolute poverty levels were
very high in Uganda. Most people did not have enough money to meet our
estimate of their basic needs. Indeed, 36 percent of Ugandans lived below
the food poverty line (statistics on food poverty are not reported in the tables
but are available from the author on request). To restate these findings, more
than one-third did not have enough even to meet only their calorie require-
ments, let alone any other needs.6 These high poverty rates are perhaps not
surprising given the country’s low national income (ranked sixth lowest in
the world in 1992 by the World Bank [1994]). Poverty rates in urban areas
were much lower than in rural areas, but were nonetheless substantial: 28
percent of urban people lived below the poverty line and 11 percent lived
6. This finding raises the question of what happens to those Ugandans who we
estimate are not getting enough calories. Note that we probably overestimate malnu-
trition and poverty because of general measurement error (as some people may un-
derreport consumption), and because we estimate calories obtained from food pur-
chases made over a short recall period (some people may be living on stocks of
Table 4.4. Poverty in the Integrated Household Survey
Population Contribution to
Location share (percent) Mean CPAE P0 P1 P2 P0 P1 P2
National 100.0 6,900 55.7 20.3 9.90 100.0 100.0 100.0
Rural 87.6 6,091 59.7 22.0 10.81 93.8 94.9 95.6
Urban 12.4 12,608 27.8 8.3 3.48 6.2 5.1 4.4
Central 30.6 8,865 45.6 15.3 7.04 25.1 23.1 21.8
East 27.9 6,115 58.8 22.0 10.85 29.4 30.3 30.6
West 24.2 6,449 53.1 18.7 9.01 23.0 22.3 22.0
93
North 17.3 5,317 72.2 28.6 14.64 22.4 24.4 25.6
Central rural 22.7 6,861 54.3 18.7 8.76 22.1 20.8 20.1
Central urban 8.0 14,564 20.8 5.7 2.16 3.0 2.2 1.7
East rural 25.4 5,866 60.6 23.0 11.38 27.6 28.7 29.2
East urban 2.5 8,633 40.4 12.6 5.52 1.8 1.6 1.4
West rural 23.1 6,223 54.3 19.2 9.31 22.5 21.9 21.7
West urban 1.1 11,299 28.9 7.3 2.60 0.6 0.4 0.3
North rural 16.5 5,195 73.0 29.0 14.83 21.6 23.5 24.7
North urban 0.8 7,677 55.2 21.2 10.92 0.8 0.9 0.9
CPAE Consumption per adult per equivalent (1989 Uganda shillings per month).
Source: Author’s calculations from household survey data provided by the Uganda Bureau of Statistics.
Table 4.5. Poverty Rates in MS-1
National 100.0 7,281 51.2 16.9 7.48 100.0 100.0 100.0
Rural 87.4 6,327 55.6 18.6 8.27 94.8 95.9 96.6
Urban 12.6 13,885 21.0 5.5 2.02 5.2 4.1 3.4
Central 31.4 9,860 34.5 10.4 4.26 21.2 19.3 17.9
East 26.5 6,085 57.6 19.7 9.06 29.9 30.9 32.1
West 26.3 6,527 53.9 17.4 7.31 27.7 27.0 25.7
94
North 15.7 5,403 69.3 24.6 11.57 21.2 22.8 24.3
Central rural 23.1 7,635 41.9 12.9 5.39 18.9 17.6 16.6
Central urban 8.3 16,044 13.9 3.3 1.10 2.2 1.6 1.2
East rural 24.5 5,783 59.8 20.6 9.56 28.6 29.9 31.3
East urban 2.0 9,765 31.4 8.1 3.00 1.2 1.0 0.8
West rural 25.2 6,307 55.3 17.8 7.52 27.2 26.5 25.3
West urban 1.2 11,219 24.7 7.4 2.73 0.6 0.5 0.4
North rural 14.6 5,203 70.7 25.3 11.97 20.1 21.8 23.3
North urban 1.1 8,029 51.4 15.2 6.33 1.1 1.0 0.9
National 100.0 7,659 50.2 16.3 7.25 100.0 100.0 100.0
Rural 87.6 6,712 54.3 17.7 7.90 94.7 95.2 95.4
Urban 12.4 14,342 21.5 6.3 2.69 5.3 4.8 4.6
Central 31.8 10,983 30.3 8.3 3.38 19.1 16.2 14.8
East 28.5 5,681 65.3 23.4 11.10 37.0 41.0 43.6
West 25.3 6,839 50.9 15.2 6.41 25.6 23.6 22.4
95
North 14.5 5,677 63.5 21.5 9.67 18.2 19.1 19.3
Central rural 23.7 8,995 36.3 9.9 4.01 17.1 14.4 13.1
Central urban 8.1 16,815 12.6 3.8 1.52 2.0 1.9 1.7
East rural 26.3 5,411 67.1 24.4 11.61 35.1 39.4 42.1
East urban 2.2 8,945 43.4 11.9 4.91 1.9 1.6 1.5
West rural 24.1 6,563 52.1 15.6 6.60 25.0 23.1 21.9
West urban 1.2 12,264 25.6 6.6 2.62 0.6 0.5 0.4
North rural 13.5 5,506 64.9 21.9 9.80 17.5 18.2 18.3
North urban 0.9 8,181 41.8 15.6 7.75 0.8 0.9 1.0
National 100.0 7,759 49.1 16.4 7.64 100.0 100.0 100.0
Rural 86.5 6,742 53.7 18.1 8.49 94.5 95.4 96.1
Urban 13.5 14,273 19.8 5.6 2.23 5.5 4.6 3.9
Central 28.8 10,672 30.4 8.2 3.16 17.8 14.4 11.9
East 30.8 6,463 58.4 21.4 10.83 36.6 40.0 43.6
West 25.1 7,371 46.3 14.5 6.29 23.6 22.1 20.7
96
North 15.4 5,525 70.2 25.1 11.84 22.0 23.4 23.8
Central rural 19.8 8,383 37.4 10.2 3.94 15.1 12.3 10.2
Central urban 9.0 15,731 14.8 3.8 1.44 2.7 2.1 1.7
East rural 28.7 6,066 60.4 22.3 11.35 35.3 38.8 42.6
East urban 2.1 11,877 31.6 9.2 3.74 1.4 1.2 1.0
West rural 23.8 7,066 47.9 15.0 6.54 23.2 21.8 20.4
West urban 1.3 13,014 16.8 4.3 1.66 0.4 0.3 0.3
North rural 14.2 5,276 72.5 25.9 12.28 21.0 22.5 22.8
North urban 1.1 8,633 41.2 14.0 6.34 1.0 1.0 0.9
National 100.0 8,078 44.4 13.7 5.91 100.0 100.0 100.0
Rural 86.7 7,127 48.7 15.2 6.56 95.0 95.8 96.3
Urban 13.3 14,264 16.7 4.3 1.65 5.0 4.2 3.7
Central 30.0 10,958 27.9 7.6 3.04 18.9 16.7 15.5
East 28.5 6,739 54.3 18.3 8.20 34.9 38.0 39.6
West 24.9 7,369 42.8 11.0 4.03 24.0 20.1 17.0
97
North 16.5 6,226 59.8 21.0 10.00 22.2 25.2 27.9
Central rural 21.3 8,957 34.5 9.6 3.91 16.6 15.0 14.1
Central urban 8.7 15,874 11.8 2.7 0.91 2.3 1.7 1.3
East rural 26.3 6,336 56.8 19.2 8.67 33.6 36.8 38.6
East urban 2.2 11,455 25.2 7.1 2.74 1.3 1.2 1.0
West rural 23.7 7,097 44.0 11.4 4.15 23.5 19.7 16.7
West urban 1.2 12,589 19.7 4.6 1.57 0.5 0.4 0.3
North rural 15.4 5,988 61.8 21.7 10.36 21.4 24.3 26.9
North urban 1.2 9,406 34.0 11.0 5.19 0.9 0.9 1.0
98 Simon Appleton
Table 4.9. T-Test Statistics for Hypothesis of Equality of Poverty

Statistics in IHS and MS-4
Location P0 P1 P2
National 13.98 18.62 18.67
Rural 10.37 14.50 14.80
Urban 10.64 10.85 9.17
Central 12.61 14.04 12.86
East 2.99 5.33 6.13
West 6.37 11.75 13.13
North 6.69 8.05 7.44
Central rural 9.83 11.15 10.37
Central urban 5.70 6.17 5.03
East rural 1.97 4.03 4.74
East urban 6.80 6.48 6.18
West rural 4.98 9.51 10.74
West urban 4.02 3.85 3.12
North rural 4.86 6.08 5.69
North urban 6.78 6.93 5.96
Source: Author’s calculations from household survey data provided by the Uganda Bureau of
Statistics.
below the food poverty line. Poverty rates showed pronounced regional dif-
ferences. In the poorest area, northern rural, 73 percent lived below the pov-
erty line. However, poverty was widespread in all areas. Even in the most
prosperous location, central urban, more than one in five people lived below
the poverty line. The other poverty indicators, P1 and P2, show similar pat-
terns across the country. The P1 index can be interpreted as the per capita
aggregate poverty gap, that is, the mean shortfall of the welfare of the poor
from the poverty line, expressed as a proportion of the poverty line and aver-
aged across the population as a whole. The P2 index is the per capita aggre-
gate poverty gap squared.7
Absolute poverty remained pervasive at the end of the four surveys. How-
ever, it did fall substantially. In MS-4, 44 percent people were poor compared
food obtained earlier). Moreover, people who are genuinely not obtaining enough
calories may still be able to function adequately, because a safety margin is built into
the World Health Organization estimates of calorie requirements. However, not ob-
taining enough calories may prevent the very poor from engaging in energy-
intensive activities, leading to destitution or worse. High rates of child stunting in the
country suggest that undernutrition is a genuine and widespread problem.
7. The advantage of the P1 indicator over P0 is that it reflects how far below the
poverty line the poor are. The advantage of the P2 indicator over P1 is that it will fall if
income is redistributed from those who are poor to those who are even poorer. Both
with 56 percent in the IHS. The 21 percent fall in the headcount was accompa-
nied by a 17 percent rise in mean consumption per adult equivalent. This im-
plies an elasticity of poverty with respect to growth of approximately –1.24.
This elasticity is rather low (in absolute terms): for example, in Nigeria, the
figure was estimated to be –1.45, while in Ghana it was put at –1.73 (World
Bank 1995). However, this seems to reflect the high level of the poverty line
rather than any regressive aspect of Uganda’s pattern of growth. Using a lower
poverty line, the food poverty line, the growth elasticity is higher, at –1.8. This
reflects the larger proportionate fall in the number of people living below the
food poverty from 36 percent to 25 percent during the period. The other Pα
indices also show marked declines, especially the P2 index. Whereas the P0 indi-
cator fell by 21 percent, P1 fell by 33 percent and P2 by 40 percent. By any stan-
dards, the fall in poverty over a period of only five years has been substantial.
As poverty rates have fallen, the cost of interventions to reduce poverty
has also fallen (although this is somewhat offset by population growth). The
P1 index is proportional to the cost (per adult equivalent) of eliminating pov-
erty through perfectly targeted transfers. Our estimates imply that the mini-
mum estimate of the cost of eliminating poverty through transfers has fallen
by more than a quarter.8 The P1 index for the IHS implies a total annual cost
of eliminating poverty through perfect transfers (“the simple sum”) of U Sh
711,419 million (1993/4 prices) or US$594 million (using the 1993 official ex-
change rate). The corresponding figures for 1997/98 are U Sh 555,378 million
(1993/4 prices) and US$464 million.9
Poverty fell in both rural and urban areas during the five-year period. Mean
living standards rose faster in rural areas: the mean rise in consumption per
advantages come at the cost of having indicators that are less immediately intuitive
than the simple headcount P0. For this reason, we often refer to the P0 when all three
indicators yield qualitatively similar results.
8. The total cost of eliminating poverty through perfect targeting is given by
n*P1*Z, where n is the population and Z the poverty line. We include Bundibugyo,
Gulu, Kasese, and Kitgum in the population, although they were excluded from the
estimate of P1. As these districts are poorer than Uganda as a whole, we will have
understated the cost (by around two percentage points in 1992).
9. It is tempting to compare these figures with Uganda’s external assistance in
1993 of US$531 million. Uganda’s present external assistance is roughly equal to the
cost of eliminating poverty through perfect targeting. However, one cannot assume
that poverty could be eradicated by channeling external assistance into transfers to
the poor. As shown in chapter 2 in this volume, the assistance currently has a consid-
erable impact in reducing poverty and thus, channeling it to transfers would worsen
the poverty gap that had to be filled by transfers, given that transfers are unlikely to
be perfect. An alternative assumption is that targeting is infeasible, in which case
transfers must be uniform. The P1 measure gives a ratio of the cost of eliminating
poverty through perfectly targeted transfers relative to that of uniform transfers. In
1997/98, it would have cost US$3,387 million to eradicate poverty through
100 Simon Appleton
adult equivalent was higher in rural areas than in urban areas (17 percent com-
pared with 13 percent). However, focusing on the urban mean may be mislead-
ing. Poverty statistics fell proportionately more in urban than in rural areas.
The headcount fell by two-fifths in urban areas, and the proportionate fall in
rural areas was less than one-fifth. Perhaps surprisingly, living standards in
central urban areas grew modestly, by 9 percent, between the first and last sur-
veys. This may be partly a consequence of in-migration: the estimated share of
the country’s population in these areas rose by 0.7 percent, a proportionate in-
crease in the size of the central urban population of 9 percent. Other urban areas
experienced large improvements in living standards, with northern and east-
ern towns seeing rises in mean consumption of 23 and 33 percent, respectively.
All regions had lower poverty in 1997/8 than in 1992, regardless of which
Pα statistic is used or whether the poverty is measured relative to the total
poverty line or just the food poverty line. Furthermore, all these reductions
in poverty are statistically significant (see table 4.9). However, the magni-
tude of the falls varied greatly. Mean consumption per adult equivalent rose
most strongly in the central region, by 24 percent, and most modestly in the
eastern region, by 10 percent. The corresponding figures for the western and
northern regions were 14 and 17 percent, respectively. These movements in
average living standards are reflected in the changes in the poverty statistics.
The central region saw the sharpest fall in poverty, with the headcount fall-
ing by more than a third, from 46 to 28 percent. In the east, the headcount fell
by only five percentage points. In the north and west, the headcount fell by
10 and 13 percentage points, respectively.
The poverty gap, P1, was halved in the central region, but fell by only 17
percent in the eastern region. One measure of the severity of poverty, P2, fell
by 57 percent in the central region, but only 24 percent in the eastern. The net
effect of these regional disparities was to widen the gap in living standards
between the central and eastern regions. In 1992, the central region accounted
for 25 percent of the poor and the eastern region accounted for 29 percent. By
1997/98, the central region accounted for only 17 percent of the poor com-
pared with the eastern region, which accounted for 38 percent. Defining
uniform transfers to all Ugandans (assuming no administrative costs). Furthermore,

if the transfers were used to fund private consumption, they would have to be per-
petual. Poverty would be eliminated in one year but would return in the next. One-
off transfers may have permanent benefits to the extent that they are saved and in-
vested, but such saving would imply transfers would have to be correspondingly
higher to raise the consumption of the poor to the poverty line. Substantial external
assistance is likely to continue in the fairly long term, but donors are unlikely to pay
indefinitely. Finally, part of the external assistance is made as loans rather than grants
or tied to particular imports. Nonetheless, it remains a legitimate question whether
external assistance could make a larger impact on poverty if it were channeled more
directly to the poor.
poverty relative to the food poverty line only, the contrast is even starker.
Although the eastern and northern regions account for less than half the popu-
lation surveyed in 1997/98, they accounted for three-fifths of those whose
total consumption was insufficient even to meet their calorie needs. (In 1992,
they accounted for just over half.) It is noteworthy that this occurred during
a time of administrative and fiscal decentralization. These institutional
changes are surely not responsible for the increasing spatial disparity in wel-
fare and poverty; however, the widening geographic inequalities may war-
rant greater government redistribution between regions.
The conclusion that poverty fell between the IHS and MS-4 is robust with
regard to the choice of poverty line. Figure 4.2 shows the results of dominance
analysis by plotting the poverty incidence curves for the five surveys. The pov-
erty incidence curves plot the headcount indices on the y axis against different
poverty lines (expressed as multiples of the original poverty line) on the x axis.
As the poverty incidence curve for the IHS is above that for the MS-4, for all
poverty lines there would be a higher headcount in the IHS than in the MS-4.
Given such first-order dominance, it also follows that poverty would be higher
in the IHS than MS-4 for all absolute poverty lines and for all Pα statistics other
than P0. By contrast, the poverty incidence curve for MS-3 intersects that for
MS-1 and MS-2 at several points, implying that the MS-3 curve does not wholly
dominate them. In particular, for very low poverty lines—those around 50
Figure 4.2. Poverty Incidence Curves, 1992–97
100
Cummulative percentage of households
80
60
40
20
0
0.4 0.6 0.8 1.0 1.2 1.4 1.6
Consumption as multiples of the poverty line
IHS MS–1 MS–2
MS–3 MS–4

102 Simon Appleton
percent of the poverty line—the headcount is higher for MS-3 than for MS-1
and MS-2. This implies that the position of the very poorest households may
have deteriorated between MS-1 and MS-3.
The emphasis of the discussion in this section and, indeed, in most of
the chapter is on comparing the first and last surveys. Movements in living
standards during the intervening surveys are not stressed. However, being
able to track changes in living standards on a yearly basis is useful in deter-
mining whether the change appears to be incremental or merely driven by
one or another survey year being somehow atypical, for example, having
an exceptionally good or bad harvest. As already noted, mean living stan-
dards grew between each survey, although the growth was strongest be-
tween the first three surveys (IHS to MS-2). The headcount index at the
national level also fell between each survey. This fairly steady year-on-year
growth and poverty reduction is reassuring, because it implies that the
improvement in living standards in the last survey, as compared with the
first, is not driven by atypical conditions such as a year of abnormal weather
conditions. That established, there has been considerable variation in growth
and poverty reduction between each of the five surveys, especially at the
regional level. For example, whether poverty was reduced between MS-2
and MS-3 is questionable. The P2 index actually worsened, while the P1
index remained constant. The time path of poverty reduction has varied
particularly at the regional level. Some poverty indicators worsened for
the western region between IHS and MS-1. The west appears to bounce
back between MS-1 and MS-2, but the eastern region and other urban areas
experienced worsening poverty. Between MS-1 and MS-2, poverty indica-
tors worsened in the north. The headcount in the central region rose be-
tween MS-3 and MS-4. Clearly poverty reduction was not smooth and con-
tinuous across all regions throughout the period.
Inequality and Growth

Poverty statistics focus only on the lower part of the distribution of welfare.
Even within that part the statistics can mask important features due to the
aggregation involved. It is therefore more informative to look at the distri-
bution in its entirety, which figure 4.2 does. A nongraphical way of present-
ing the distribution is to report the values of consumption per adult equiva-
lent at the median and at other deciles (table 4.10). The median rise in living
standards between the IHS and MS-4 was 19 percent, two percentage points
higher than the rise in the mean. As implied by the dominance analysis,
consumption per adult equivalent was higher in MS-4 than in the IHS at all
deciles. Comparing the relative gains (not tabulated), the lower (poorer)
deciles tend to experience a greater rise in living standards. The rise in con-
sumption per adult equivalent is 27 percent at the bottom decile, 23 percent
at the second decile, and 21 percent for the third poorest. Disaggregating
Table 4.10. Consumption Per Adult Equivalent at Each Decile

(1989 U Sh per month)
Decile IHS MS-1 MS-2 MS-3 MS-4

National
1 2,487 2,900 2,901 2,792 3,162
2 3,235 3,640 3,657 3,664 3,992
3 3,958 4,355 4,415 4,472 4,799
4 4,667 4,995 5,195 5,227 5,575
5 5,459 5,847 5,936 6,011 6,478
6 6,394 6,732 6,793 7,053 7,406
7 7,591 7,923 8,038 8,370 8,971
8 9,182 9,708 9,892 10,461 10,786
9 12,233 12,796 13,641 14,174 14,170
Rural
1 2,393 2,809 2,800 2,694 3,061
2 3,107 3,452 3,552 3,494 3,833
3 3,777 4,163 4,216 4,226 4,534
4 4,430 4,744 4,881 4,959 5,267
5 5,183 5,423 5,589 5,661 6,016
6 5,917 6,267 6,359 6,487 6,898
7 6,975 7,292 7,361 7,509 7,922
8 8,320 8,516 8,854 9,135 9,729
9 10,552 10,680 11,376 12,194 12,126
Urban
1 4,102 4,746 4,519 4,596 5,172
2 5,368 6,247 6,129 6,338 6,972
3 6,715 7,789 7,376 8,103 8,570
4 8,147 9,455 8,804 9,375 9,894
5 9,523 11,365 10,313 11,544 11,408
6 11,162 13,103 12,906 13,402 13,231
7 13,424 15,001 16,158 15,364 15,795
8 16,623 18,447 20,147 18,752 20,143
9 22,003 24,577 27,696 26,207 27,372
Statistics.
into rural and urban areas, the pattern in rural areas is close to that in the
country as a whole. However, in urban areas, the picture is rather different.
For a start, the median rise in consumption per adult equivalent in urban
areas during the period was 20 percent, substantially more than the 13 per-
cent rise in mean consumption per adult equivalent. Similarly, large rises
were apparent for all urban deciles. Consequently, mean consumption per
adult equivalent provides a misleading picture of the overall improvement
104 Simon Appleton
in living standards of the urban population.10 Using the median rather than
the mean implies that urban living standards have risen faster than rural
ones. In urban areas as in rural areas, there was again a tendency for con-
sumption to rise more at the lower deciles. For example, consumption rose
by 26 percent at the bottom decile; for the second and third deciles the rise
was 39 and 28 percent, respectively.
Focusing on growth at the median and at each decile implies a rather dif-
ferent time path from that implied by growth at the mean. Both perspectives
agree that there was substantial growth of more than 5 percent between the
IHS and MS-1. However, growth between MS-3 and MS-4 is also high (more
than 5 percent) at the median, but less than half that at the mean. Viewed at
the median, growth between MS-1 and MS-3 was modest (2.8 percent). In-
deed, during this period, the poorest 20 percent of the population did not
experience noticeable improvements in living standards and the poorest got
poorer. Consumption per adult equivalent at the bottom decile was 4 percent
lower in MS-3 than in MS-1, while for the second decile, living standards were
essentially unchanged.
Table 4.11 reports the Gini coefficients for the surveys as a measure of
the overall inequality in consumption per capita. The Gini coefficient, and
hence inequality, falls between the first and last surveys. This indicates that
the lower deciles saw greater rises in living standards than the more afflu-
ent. The improvement in the progressivity of the distribution is most marked
in urban areas.11
The fall in inequality within Uganda has made some contribution to pov-
erty reduction, but most of the gains can be attributed to overall growth. This
is shown by a decomposition of the change in poverty statistics between IHS
and MS-4 following Datt and Ravallion (1992). We decompose the change in
a poverty indicator P between two years, t1 and t2 into three components:
growth, G; distribution, D; and a residual, R:
Pt – Pt = G + D + R.
2 1
The growth component, G, is the difference between the initial poverty

indicator and what would have arisen from distributionally neutral growth.
10. Consumption seems to have fallen during the surveys for some households
who were in the top 10th of the urban population. Because these households have
high consumption, their fortunes are influential in determining the mean rise in con-
sumption per adult equivalent, which is calculated in the macroeconomic way by
summing consumption across all households and dividing that sum by the popula-
tion. Whether the apparent fall in the living standards of the top 10th of the urban
population is genuine requires further investigation. However, it is not central to this
chapter given our focus on the poor.
11. Like the discrepancy between mean and median growth in urban areas, this
was partly driven by the apparent fall in consumption among the top 10 percent of
the urban population.
Table 4.11. Gini Coefficients for Uganda
Survey Rural Urban National

IHS 0.326 0.394 0.364
MS-1 0.296 0.365 0.345
MS-2 0.320 0.396 0.365
MS-3 0.325 0.373 0.366
MS-4 0.311 0.345 0.347
Statistics.
That is to say, if there was the same mean per capita consumption, M, as in
year t2, but the same relative distribution (Lorenz curve, L) as in t1 , then
G = P(Mt , Lt ) – Pt .
2 1 1
The distribution component, D, is the difference between the initial pov-

erty indicator and what would have arisen from a pure distributional change;
that is, if there was the same mean per capita consumption as in year t1 but
the same relative distribution as in t2, then
D = P(Mt , Lt ) – Pt .
1 2 1
Figure 4.3 shows the results of this decomposition. Growth accounts for
95 percent of the fall in the percentage of Ugandans in poverty. Improve-
ments in distribution account for only 3 percent of the fall. For the other
poverty indices, the contribution of shifts in the distribution of welfare rises
relative to that of growth, but remains secondary. For the P1 index, distribu-
tional changes account for a fifth of the fall in poverty, while for the P2 index,
they account for 29 percent.
Sectoral Decomposition of Poverty Changes

Poverty statistics can be disaggregated in many ways. One interesting disag-
gregation is by economic sector, as this provides a potential link between
macroeconomic events and welfare of households. Table 4.12 classifies house-
holds into mutually exclusive sectors roughly corresponding to those used
in standard national accounts. With two exceptions, the classification is based
on the main industry in which the household head works. One exception is
for households that grew coffee. These households are defined as cash crop
households, regardless of the head of the household’s occupation. Typically,
such households will obtain more revenue from food crops, but are still as-
signed to the cash crop sector. The other exception is for households where
the head is not working (mainly households with retired heads). These house-
holds were placed into a separate category “not working,” although some
members may be generating income. The classification is a convenience
designed to obtain mutually exclusive assignments of households to sectors
106 Simon Appleton
Figure 4.3. Growth and Redistribution Decomposition, 1992–1997/98
100
Percentage contribution to change in poverty
80
60
40
20
–20
P0 P1 P2
Growth Distribution Residual
given the data constraints (which include the absence of data on income by
sector in the monitoring surveys). In reality, households may work in many
industries, and in some cases the main industry in which the head works
may not be the household’s most important source of income.
We disaggregated poverty by sector for the IHS and for MS-3 (tables 4.12
and 4.13). We could not carry out the disaggregation in MS-4 because the
survey did not identify which crop farmers grew cash crops. In 1992 most
Ugandans (70 percent) lived in households where the head’s main activity
was crop farming.12 Around one-third of those individuals lived in house-
holds growing some nonfood cash crop. This reflects the fact that coffee grow-
ing was widespread, despite the fact that in 1992/93 it accounted for only
around 3 to 4 percent of total crop agricultural revenue (World Bank 1996).
There is some evidence of movement into cash crops during the period of the
surveys; for example, the size of the sector increased from covering 23 per-
cent of people in the IHS to covering 27 percent in MS-3. However, there is
no evidence of a movement out of agriculture; indeed, the sector grew slightly
12. Henceforth, for ease of expression, we will refer to people as being in a sector
if their head’s main activity is in that sector. This should not be taken to imply that all
the people said to be in the sector actually work in the sector.
Table 4.12. Poverty by Sector of Household Head, IHS
Sector share (percent) Mean CPAE P0 P1 P2 P0 P1 P2
National 100.0 6,900 55.7 20.3 9.90 100.0 100.0 100.0
Food crop 47.2 5,649 64.1 24.5 12.32 54.3 57.0 58.8
Cash crop 23.4 6,027 60.4 20.7 9.59 25.4 23.8 22.7
Noncrop agriculture 2.7 6,642 55.0 22.2 11.31 2.6 2.9 3.1
Mining 0.1 9,418 31.5 2.6 0.21 0.0 0.0 0.0
Manufacturing 3.7 8,009 43.6 15.8 7.63 2.9 2.9 2.9
107
Public utilities 0.1 9,089 33.6 5.6 1.62 0.1 0.0 0.0
Construction 1.3 10,656 36.4 11.5 4.58 0.9 0.8 0.6
Trade 6.7 11,864 25.2 7.2 3.11 3.0 2.4 2.1
Hotels 0.5 10,054 25.8 8.1 3.30 0.2 0.2 0.2
Transport and
communication 1.5 9,787 31.5 11.0 5.05 0.9 0.8 0.8
Miscellaneous services 1.6 12,561 26.6 10.2 5.03 0.8 0.8 0.8
Government services 6.8 10,104 36.2 10.5 4.49 4.4 3.5 3.1
Not working 4.3 6,929 58.2 22.9 11.65 4.5 4.8 5.0
CPAE Consumption per adult equivalent.
Table 4.13. Poverty by Sector of Household Head, MS-3
Sector share (percent) Mean CPAE P0 P1 P2 P0 P1 P2
National 100.0 7,764 49.1 16.4 7.64 100.0 100.0 100.0
Food crop 44.2 5,813 62.1 22.5 10.99 55.8 60.6 63.5
Cash crop 26.7 7,519 46.0 11.9 4.52 25.0 19.4 15.8
Noncrop agriculture 2.1 8,197 40.2 14.5 6.89 1.7 1.8 1.9
Mining 0.2 5,974 74.2 12.7 2.85 0.3 0.1 0.1
108
Manufacturing 3.3 10,181 27.1 8.7 3.60 1.8 1.7 1.6
Public utilities 0.1 13,192 11.3 1.5 0.19 0.0 0.0 0.0
Construction 1.1 9,695 35.0 8.7 3.02 0.8 0.6 0.4
Trade 6.9 13,248 20.0 4.5 1.66 2.8 1.9 1.5
Hotels 1.0 11,972 19.3 5.1 1.65 0.4 0.3 0.2
Transport and
communication 1.9 14,084 14.8 6.6 3.23 0.6 0.8 0.8
Miscellaneous services 2.2 11,428 27.9 10.8 4.88 1.2 1.4 1.4
Government services 5.5 11,387 29.5 7.7 2.90 3.3 2.6 2.1
Not working 4.9 7,662 62.1 29.0 16.60 6.3 8.7 10.8
CPAE Consumption per adult equivalent.
in terms of population share during the surveys. Trade and government ser-
vices were the next most populous sectors, each covering 7 percent of Ugan-
dans. Trade did not change in size during the surveys, although households
in the government sector decreased from 6.8 percent in the IHS to 5.5 percent
in the MS-3. The “not working” sector was the next largest sector, growing
from 4.3 to 4.9 percent. Manufacturing remained fairly constant at around
3.5 of the population. Other sectors covered 2 percent or less of the popula-
tion, with some sign of growth in the size of the service sector.
The food crop sector was the poorest of the major sectors in 1992/93, and
this sector experienced only relatively modest declines in poverty. The P0
and P1 indicators fell by less—both absolutely and relatively—than those for
the country as a whole. Cash crop farming was the second poorest sector in
the IHS, but this sector experienced dramatic declines in poverty between
the IHS and MS-3. Regardless of the poverty indicator used, the reduction in
poverty in the cash crop sector was more than twice as large as that in the
country as a whole.13 These improvements in poverty were driven by an above
average rises in mean consumption per adult equivalent, which rose by a
third in the sector. One factor underlying these gains was the rise in the world
price for coffee during the period. The unit price of Ugandan coffee exports
was as follows:
Fiscal year Price (US$/kg)

1991/92 0.86
1992/93 0.82
1993/94 1.14
1994/95 2.55
1995/96 1.72
1996/97 1.38
1997/98 1.57
Source: Republic of Uganda (1994, 1997a, 2000).
At the height of the coffee boom, Uganda was receiving export prices for
coffee that were triple those in 1992. Other factors were also important. Poor
weather conditions in coffee growing areas depressed output in 1991/92.
Output was also likely to have been enhanced by the price and market liber-
alization policies in the coffee subsector. Although these were initiated in
1990, a lagged response in output was likely because of the time needed for
newly planted coffee trees to bear fruit.
13. This comparison is fairly straightforward, because poverty rates in the cash
crop sector were of a similar magnitude to those in the country as a whole in the IHS.
Between the IHS and MS-3, the headcount fell by 24 percent for the cash crop sector; for
the country it fell only half as much—by 12 percent.
110 Simon Appleton
Poverty fell in nearly all sectors. One exception was mining, although
this result may be questionable, given the very small sample size. In addi-
tion, there was an increase in the headcount defined relative to the food pov-
erty line in the miscellaneous service sector (and mean consumption per adult
equivalent fell), but other poverty statistics for that sector improved slightly.
However, perhaps the most notable exception to the generally favorable trends
was in the nonworking sector, where all poverty indicators worsened de-
spite rising mean consumption per adult equivalent. The headcount rose only
slightly, but this rise masks more serious deterioration in other indicators.
The P1 statistic rose by more than a quarter and the P2 statistic by two-fifths.
The cash crop sector was not the only one to experience reductions in
poverty much above the national trend. Although manufacturing and trade
started from much lower initial levels of poverty, both saw greater propor-
tionate reductions. Hotels, construction, and transport and communications
also performed strongly. The government sector lagged somewhat behind
the country as a whole in terms of growth in mean per capita consumption,
although poverty rates fell comparably.
It is possible to decompose the national change in poverty into the effects
of changes in poverty within sectors and movements between sectors
(Ravallion and Huppi 1991). This allows one to assess whether poverty has
fallen because people within certain sectors have become better off or be-
cause people have moved to more affluent sectors. If Pt1 is a poverty indica-
tor for time t1, then:
Pt2 – Pt1 = Σ(Pit2 – Pit1)nit1 intrasectoral effects
+ Σ(nit2 – nit1)Pit1 intersectoral effects
+ Σ(Pit2 – Pit1)(nit2 – nit1) interaction effects,
where nit2 is the proportion of the population in sector i at time t1 and Pit1 is
the poverty indicator for sector i at time t1. The interaction effects tell us
whether people switched out of or into sectors where poverty was falling (if
positive, people moved into sectors where poverty was falling).
Applying this methodology to Uganda, table 4.14 shows that an improve-
ment in the conditions of cash crop farmers and their families was respon-
sible for more than half of the improvement in poverty between the IHS and
MS-3. Improvements in the lot of food crop farmers made a more modest
contribution to the fall in the headcount, but these accounted for around a
quarter of the improvement in other poverty indicators. Other sectors made
more modest contributions, with trade, manufacturing, and government ser-
vices being the more noticeable (largely due to their size). The table also re-
veals the worsening poverty of those in households whose head was not
working. Population shifts between sectors also help explain some of the
improvement in poverty, but their contribution is less, only around 2 to 4
percent. Interaction effects were positive, implying that people moved into
sectors where poverty was falling faster, such as cash crop farming.
Table 4.14. Sectoral Decomposition of Changes in Poverty between IHS

and MS-3
Percentage contribution to
Sector P0 P1 P2
Food crop 14.1 24.2 27.7
Cash crop 50.8 52.6 52.6
Noncrop agriculture 6.0 5.3 5.2
Mining –0.5 –0.2 –0.1
Manufacturing 9.3 6.8 6.6
Public utilities 0.3 0.1 0.1
Construction 0.3 1.0 0.9
Trade 5.3 4.8 4.3
Hotels 0.5 0.4 0.4
Transport and communication 3.8 1.7 1.2
Miscellaneous services –0.3 –0.2 0.1
Government services 6.9 4.8 4.8
Not working –2.5 –6.8 –9.4
Total intrasectoral 94.0 94.3 94.4
Total intersectoral 2.9 3.3 3.7
Total interaction 3.0 2.4 1.9
Statistics.
Summary and Conclusions

The data on private consumption from five recent Ugandan household sur-
veys provide a picture of rising living standards in accordance with the mac-
roeconomic data on growth. The finding that urban living standards have
risen is unsurprising, given the many indicators of strong performance of
nonagricultural sectors and the visible progress in the major towns. How-
ever, the household survey data is perhaps the strongest evidence available
that living standards in rural areas have also improved commensurately with
the macroeconomic statistics. The growth in the household surveys was not
driven by any one year being atypical. Average living standards improved
between each of the five surveys. Moreover, the growth was broadly based
as it was shared across the income distribution. Real consumption per capita
has risen for all deciles, implying a reduction in poverty regardless of where
the poverty line is set. Indeed, living standards grew most rapidly for the
poorer deciles, leading to a fall in inequality.
We drew an absolute poverty line for Uganda, sufficient to meet calorie
needs given the typical diet of the bottom half of the population and to
meet minimum nonfood requirements. The line implies that 56 percent of
Ugandans were poor in the first survey in 1992. This percentage fell to 44
112 Simon Appleton
percent in last survey in 1997/98, a significant and substantial reduction in

poverty during a relatively short interval of five years. The reduction in
poverty is explained mainly by growth, although falling inequality also
contributed. Poverty reduction has been uneven across economic sectors,
with those engaged in cash crop farming, manufacturing, and trade faring
particularly well. The improvement in the living standards of those grow-
ing cash crops accounts for more than half of the fall in poverty during the
period. Although the data generally imply improvements in welfare, growth
was not uniform, and a number of less favorable trends were identified.
Regional disparities were exacerbated during the period, with the central
region growing the most strongly and the eastern region lagging behind.
At the median, living standards rose more in urban areas than in rural ar-
eas. Finally, poverty worsened in the first four surveys for those households
where the head was not working.
The rise in living standards observed in the surveys is evidence of broadly
based growth. Although there is much debate about whether growth “trickles
down,” such terminology is clearly inappropriate here. If anything, growth in
living standards has been strongest among poorer households. Nonetheless,
many questions remain concerning implications for the future and for our
understanding of the recent past. The period considered is relatively short—
five years—and whether the impressive reduction in poverty observed here
can be sustained in the long term has yet to be determined. Note that the growth
in the living standards of the very poorest was somewhat erratic, with no im-
provements between 1993/94 and 1995/96. The extent of the reduction in pov-
erty in the future will partly depend on whether growth can be sustained, but
also on how growth is distributed. On the latter point, the experience of 1992–
98 may be a poor guide for the future, because growth at that time was driven
partly by the coffee boom and partly by a process of recovery from the eco-
nomic collapse of the 1970s and 1980s.
The temporary nature of the coffee boom raises the issue of whether the
associated rise in living standards observed will only be temporary. A merit
of using consumption rather than income to measure welfare is that, ac-
cording to the permanent income hypothesis, temporary windfalls will have
less effect on consumption. Indeed, empirical research has tended to con-
firm that export crop farmers do often save heavily out of any windfalls
resulting from price booms (Bevan, Collier, and Gunning 1993). Conse-
quently, consumption is unlikely to fall with the end of coffee boom and,
indeed, the last survey, MS-4, provides no evidence that it has. However,
whether future growth will have the same effect on poverty as that arising
from the coffee boom is not clear. Much will depend on the sources of
growth, such as the extent to which the poor derive income from growing
sectors or can enter such sectors. One reason why growth during the pe-
riod has reduced poverty so much is that before the boom, coffee farmers
were as poor as the average Ugandan.
More generally, the period studied may mark Uganda’s transition from
recovery to fresh growth. Although long-term comparisons are problematic,
it appears that Uganda has not yet returned to the real per capita income
levels enjoyed in the early 1970s. The process of recovery to achieve those
income levels may have involved a pattern of growth that is quite different
from what will arise with subsequent development. Recovery has necessi-
tated the rehabilitation of traditional export crops, the restoration of the pub-
lic sector, and a reversal of the retreat to subsistence. Although predicting the
nature of future growth is hard, it is unlikely to be a simple continuation of
the processes of recovery. These considerations imply a need to continue
monitoring poverty and living standards at the microeconomic level.
Annex 4.1. Methodology

This annex explains the main assumptions and principles that underlie the
results reported in this chapter. More detailed explanations are provided in
an extended version of this chapter available upon request from the author.
Obtaining Consistent Estimates of Consumption

Table A4.1 reports the estimates of consumption per capita as calculated in
the official survey reports and after a number of adjustments.14 There were
six adjustments:
• The exclusion of Kasese, Kitgum, Gulu, and Bundibugyo districts. Exclu-
sion of these districts was necessary because fears about safety meant
that large parts of these districts were not covered in MS-4. These four
districts included 6.9 percent of Uganda’s population in the 1991 cen-
sus (Republic of Uganda 1995). They are relatively poor, so that their
omission raises mean consumption per capita by 1.8 percent in the
IHS and by 2.3 percent in the MS-1.
• Adjustment for public transport fares. The IHS omitted an item for fares
on public transport. To adjust for this, a value for such an item was
imputed using the regional shares in the MS-1.15 Omission from the
IHS of health expenditures for Arua district was dealt with in a
14. The figures differ very slightly from those in the official survey reports, per-
haps due to subsequent cleaning of the data.
15. This is a striking example of sensitivity to questionnaire design. Both the IHS
and MS had an item for “other transport expenses,” but only the MS questionnaire
explicitly mentioned public transport fares as an example. To adjust for the change in
questionnaire design, we did not include the item as reported in the IHS, but instead
assumed the item had the same share as in the MS-1 (with separate shares for rural
and urban areas).
Table A4.1. Adjusted Comparison of Mean Consumption Per Capita
(U Sh per month)
Mean consumption per capita HIS 1992/93 MS-1 1993/94 MS-2 1994/95 MS-3 1995/96 MS-4 1997/98
National
As calculated in official reports 11,574 13,195 15,221 17,499 20,540
1. Excluding Gulu, Kasese, Kitgum, and Bundibugyo 11,786 13,501 15,388 17,721 20,747
2. Adjusting for public transport fares 11,981 n.a. n.a. n.a. n.a.
3. Revaluing home consumed food at market prices 12,769 14,748 16,643 18,568 21,976
4. Adjusting for regional prices 13,187 15,267 17,064 18,973 22,139
5. Adjusting for inflation (1989 prices) 5,452 5,825 6,058 6,187 6,353
6. Reweighting MS-1 5,452 5,718 6,058 6,187 6,353
Rural
114
5. Adjusting for inflation 4,701 4,794 5,206 5,242 5,488
6. Reweighting MS-1 4,735 4,862 5,206 5,242 5,488
Urban
5. Adjusting for inflation 10,752 12,919 12,067 12,246 11,979
6. Reweighting MS-1 10,752 11,645 12,067 12,246 11,979
similar manner. These adjustments together raise the mean consump-

tion figure for the IHS by 1.7 percent.
• Revaluing home-consumed food at market values. Interviewers were sup-
posed to make sure that respondents valued home consumption of
food in farm-gate prices. Farm-gate and market prices were estimated
based on the unit values in the surveys for home consumption and
purchases of food, respectively.16 Estimates were done separately by
region and urban-rural location (that is, eight sets of prices were iden-
tified). The revaluation increased the estimated value of home con-
sumption of food by approximately 30 percent.
• Adjusting for regional prices. Food prices are markedly higher in some
areas of Uganda, particularly in urban areas, than they are in others. It
was possible to use unit values for purchases of major food items to
construct regional food price indexes for each survey. Median unit val-
ues were used to make the results insensitive to outliers. Nonfood prices
were assumed to be constant across the country. It is sometimes argued
that nonfood prices may be higher in rural areas due to transport costs,
but this is not well established. In a study of the Côte d’Ivoire, Grootaert
and Kanbur (1994) found nonfood prices to be generally lower in rural
areas than in urban areas. The regional price adjustment is important
primarily when making intracountry (for example, urban-rural) com-
parisons rather than intertemporal comparisons.17
• Adjusting for inflation. Adjusting for inflation is probably the most
important adjustment when making comparisons over time. The
composite national consumer price index (CPI) was used as the price
deflator and expenditures were converted into 1989 prices. Although
the CPI is only collected for major urban areas, it does appear fairly
reliable. During the period, there were no price controls or other dis-
tortions. Furthermore, an earlier exercise for the period 1989–92 us-
ing unit values from household survey data had largely corrobo-
rated the CPI.
16. This was complicated by the fact that quantities could be reported in different
units, including some unspecified measures such as “heaps,” “bunches,” and so on.
Where possible only metric measures were used. For some items most units codes
were nonmetric, in which case only reports with a single unit code were used to avoid
having to make different units comparable. It was not necessary to convert quantities
into metric units except when calculating calories per shilling for the food poverty
line. For that purpose, conversion factors from Kayiso (1993) were used for nonstand-
ard unit codes for the few items where output was never reported in metric units.
17. It does raise the overall national expenditures somewhat, because prices were
adjusted to survey median values. Urban areas were oversampled, and this effect is
not corrected for when calculating median values, so the survey prices dispropor-
tionately reflect higher urban prices.
116 Simon Appleton
• Reweighting MS-1. MS-1 assigned low weights to certain households

that were either previously surveyed in the IHS or were in enumera-
tion areas surveyed in the IHS. Subsequent monitoring surveys did
not weight such households differently from others. Consequently,
MS-1 was reweighted to make its population multipliers comparable
to those in MS-2 and MS-3. The main impact of this adjustment was to
remove a rather implausible deterioration in urban living standards
between MS-1 and MS-2.
Setting the Poverty Line

The MS-1 data are used to calculate an absolute poverty line. This is derived
from a food poverty line, showing the cost of meeting calorie requirements
given the typical diets of poor Ugandans, and an estimate of the cost of meet-
ing nonfood requirements.
CALORIE REQUIREMENTS. Lipton and Ravallion (1995) identify the energy re-
quirements set by the World Health Organization (WHO 1985) as the most
widely used official estimates. Consequently, we adopted these guidelines
for Uganda. WHO calorie requirements vary by body size, age, sex, daily
activities, pregnancy, and lactation. We followed the principles laid out by
WHO in adjusting for these factors. Our calculations were based on the as-
sumption that adults are engaged in farming, and we estimated energy re-
quirements based on the time use data provided in the IHS. The calculations
were involved; however, our results yielded similar multiples of basal meta-
bolic rates to those given by WHO in their illustrative examples of a subsis-
tence farmer and a rural woman in a developing country (WHO 1985, tables
10 and 14). The estimated calorie requirements by age and sex are presented
in table A4.2. We first define the poverty line according to the needs of a man
aged 18 to 30. This poverty line can then be compared with household con-
sumption per adult equivalent, where the adult equivalence scales measure
needs relative to a man aged 18 to 30.
THE FOOD POVERTY LINE. Many combinations of foods (food baskets) could
meet the requirement of 3,000 calories. We focus on the food basket of the
poorest 50 percent of Ugandans, ranked by consumption per adult equiva-
lent. Previous work using the IHS data defined a poverty line based on the
consumption patterns of the bottom 50 percent and found that more than
half of Ugandans lived below this line (World Bank 1996). To calculate the
food poverty line, we first use the MS-1 data to estimate the mean quantities
of 28 major food items (see table 4.2) consumed by the poorest 50 percent.
These mean quantities constitute a reference food basket: the typical food
basket of the poor. We then estimated how many calories were generated by
the reference food basket. We did this calculation using the calorific values of
East African foods as reported by West (1987) (see table 4.2). For some foods,
Table A4.2. Daily Calorific Requirements and Equivalence Scales
Male Female
Calorie Equivalence Calorie Equivalence
Age requirement scale requirement scale
0 755 0.25 700 0.23
1 1,200 0.40 1,140 0.38
2 1,410 0.47 1,310 0.44
3 1,560 0.52 1,440 0.48
4 1,690 0.56 1,540 0.51
5 1,810 0.60 1,630 0.54
6 1,900 0.63 1,700 0.57
7 1,990 0.66 1,770 0.59
8 2,070 0.69 1,830 0.61
9 2,150 0.72 1,880 0.63
10 2,190 0.73 2,015 0.67
11 2,340 0.78 2,130 0.71
12 2,440 0.81 2,225 0.74
13 2,560 0.85 2,295 0.77
14 2,735 0.91 2,370 0.79
15 2,875 0.98 2,385 0.88
16 2,990 1.00 2,425 0.89
17 3,090 1.02 2,435 0.89
18–29 3,025 1.00 2,350 0.87
30–39 2,960 0.99 2,325 0.87
40–59 2,960 0.99 2,295 0.86
60+ 2,290 0.86 1,830 0.77
Note: Equivalence scales for children aged 14 and under are obtained by dividing calorific
requirements by 3,000. Equivalence scales for adults are given by 0.42 + 0.58 × (calorie
requirements/3,000).
Source: Calorie requirements are author’s calculations from the IHS based on guidelines from
WHO (1985).
part of the food weight was inedible or lost in preparation. Estimates of the
ratio of the food retained for consumption are given in table 4.2. Multiplying
the mean quantities of foods consumed by their calorific value and retention
rates, we estimated that the poorest 50 percent of Ugandans consumed around
1,373 calories per day per person (not per adult equivalent). Consequently,
the typical diet of poor Ugandans would have to be scaled upward by a fac-
tor of 2.18 to generate 3,000 calories per person per day. Scaling up the refer-
ence food basket by this factor gave us the food basket that was costed to
identify the food poverty line. The total cost of the food basket, which repre-
sents our food poverty line, is U Sh 11,463 per month (in the average prices of
the MS-1 survey; these MS-1 prices must be deflated by 2.63 to be converted
to the 1989 prices used in reporting most real expenditures in this chapter).
118 Simon Appleton
NONFOOD REQUIREMENTS. We followed Ravallion and Bidani (1994) in identi-

fying nonfood requirements, NF, as the nonfood expenditure of those whose
expenditure is just equal to the food poverty line, zf . The rationale for this is
that, because at this level of welfare the poor have sacrificed some of their need
for calories, the nonfood expenditures they have chosen to give priority to
should also be regarded as meeting essential needs. Different locations were
allowed different nonfood requirements. On average, the model predicts a mean
food share of 0.566 for households whose total consumption is just sufficient to
meet their calorie requirements (see the second column in table 4.3). This gives
a national poverty line of U Sh 16,443 per adult equivalent per month (MS-1
prices). Taking a purchasing power parity exchange rate of U Sh 369 to the U.S.
dollar, this is equivalent to US$44.56 per adult equivalent a month. (At the
official exchange rate of U Sh 1,195 per U.S. dollar, it amounts to US$13.76 a
month.) In the case of Uganda, the line is equivalent to US$34 per capita per
month, and hence is comparable to the US$1 a day poverty line sometimes
used for international poverty comparisons by the World Bank.
Rather than use a single “all Uganda” poverty line, the lines were allowed
to differ by location because estimated nonfood requirements vary (the third
column of table 4.3). Predicted food shares were much lower in urban areas
than in rural areas, for example, 0.49 in the central urban compared with 0.68
in western rural. Consequently, the western rural had the lowest poverty
line, U Sh 15,189 (MS-1 prices) per adult equivalent per month, while the
central urban had the highest, U Sh 17,314.18 These regional differences in
poverty lines are relatively modest. However, note that a single food basket
was used for all regions and was valued in constant prices. Because food
prices are much higher in urban areas, the difference between urban and
rural poverty lines is much greater when valuing in nominal terms (and not
at constant prices).19 In nominal terms, the poverty line for central urban was
106 percent higher than that for western rural.
The derived poverty lines are based on the calorie requirements of a Ugan-
dan man aged 18 to 30. To use the lines to assess poverty with households of
different demographic composition, we need a set of equivalence scales to
measure the needs of different age and sex groups. We used relative calorie
18. That western rural should have the lowest poverty line raises some doubts
about the appropriateness of working with a national food basket. One reason why
the food share may be predicted to be higher in western rural (and hence the poverty
line lower) is that it is more expensive to obtain sufficient calories using matooke, a
favored staple in the western region.
19. The food poverty lines in nominal terms (fourth column of table 4.3) are not
equal to the food poverty lines in national prices scaled by our estimated regional
food price index. This is because the food price index was based on the consumption
patterns of the whole population, whereas the poverty line is based on the consump-
tion patterns of the poorest half of the population.
requirements to measure relative food needs. All adults are assumed to have
equal nonfood needs regardless of sex or age. For calculating equivalence
scales for adults, we assumed that 58 percent (the mean food share) of the
scale is equal to calorie requirements divided by 3,000. The remaining 42
percent of the scale was assumed to be the same for all adults. Small children
can more reasonably be said to have lower nonfood requirements. Rather
arbitrarily, we assumed that children’s nonfood requirements are lower than
those of men by the same proportion as their relative calorie requirements.
The resulting equivalence scales are reported in table A4.2.
References
Appleton, Simon. 1996. “Problems of Measuring Changes in Poverty over
Time: The Case of Uganda 1989–1992.” Institute of Development Studies
Bulletin 27(1): 43–55.
Appleton, Simon, I. Chessa, and J. Hoddinott. 1999. “Are Women the Fairer
Sex? Looking for Gender Differences in Gender Bias in Uganda.” Uni-
versity of Oxford, Centre for the Study of African Economies, U.K.
Processed.
Bevan, David, Paul Collier, and Jan Gunning. 1993. “Trade Shocks in Devel-
oping Countries: Consequences and Policy Responses.” European Eco-
nomic Review 37(2–3): 557–65.
Datt, Gaurav, and Martin Ravallion. 1992. “Growth and Redistribution Com-
ponents of Changes in Poverty Measures: A Decomposition with Ap-
plication to Brazil and India in the 1980s.” Journal of Development Eco-
nomics 38(2): 275–95.
Foster, James, Joel Greer, and Erik Thorbecke. 1984. “A Class of Decompos-
able Poverty Measures.” Econometrica 52(May): 761–66.
Grootaert, Christian, and Ravi Kanbur. 1994. “A New Regional Price Index
for Côte d’Ivoire Using Data from the International Comparisons
Project.” Journal of African Economies 3(1): 114–41.
Kakwani, Nanak. 1993. “Statistical Inference in the Measurement of Poverty.”
Review of Economics and Statistics 75(4): 632–39.
Kayiso, P. K. 1993. “Final Report on Conversion Factors and Regional Price Indi-
ces.” Ministry of Finance and Economic Planning and Program to Allevi-
ate Poverty and the Social Cost of Adjustment, Kampala. Processed.
Kikafunda, Joyce, Louise Serunjogi, and Michael Migadde. 1992. “Final Re-
port on Establishment of a Nutrition Based Absolute Poverty Line
120 Simon Appleton
for Uganda.” Ministry of Finance and Economic Planning and Pro-

gram to Alleviate Poverty and the Social Cost of Adjustment,
Kampala. Processed.
Lipton, Michael, and Martin Ravallion. 1995. “Poverty and Policy.” In Jere
Behrman and T. N. Srinivasan, eds., The Handbook of Development Eco-
nomics, vol. III. Amsterdam Elsevier.
Ravallion, Martin, and Benu Bidani. 1994. “How Robust Is a Poverty Line?”
World Bank Economic Review 8(1): 75–102.
Ravallion, Martin, and Monica Huppi. 1991. “Measuring Changes in Pov-
erty: A Methodological Case Study of Indonesia during an Adjust-
ment Period.” World Bank Economic Review 5(1): 57–82.
Republic of Uganda. 1994. “Background to the Budget 1994–1995.” Ministry
of Finance and Economic Planning, Kampala.
_____. 1995. “The 1991 Population and Housing Census Analytic Report,”
vol. 1, “Demographic Characteristics.” Ministry of Finance and Eco-
nomic Planning, Entebbe.
_____. 1996. “Background to the Budget 1995–1996.” Ministry of Finance and
Economic Planning, Kampala.
_____. 1997a. “Background to the Budget 1997–1998.” Ministry of Planning
and Economic Development, Kampala.
_____. 1997b. “Poverty trends in Uganda, 1989–1995.” Discussion Paper no.
1. Ministry of Finance and Economic Planning, Coordination of Pov-
erty Eradication Project and Statistics Department, Kampala.
_____. 1999. “Uganda Participatory Poverty Assessment: A Summary of Key
Findings and Policy Messages.” Ministry of Finance and Economic
Planning, Kampala.
_____. 2000. “Background to the Budget 2000-2001.” Ministry of Planning
and Economic Development, Kampala.
UNDP (United Nations Development Programme). 1997. Uganda Human
Development Report. Kampala.
West, Clive. 1987. “Food Composition Table.” Wageningen Agricultural Uni-
versity, Department of Human Nutrition, De Drejien, Netherlands.
Processed.
WHO (World Health Organization). 1985. “Energy and Protein Require-
ments.” WHO Technical Report Series no. 724. Geneva.
World Bank. 1994. World Development Report: Infrastructure for Development.
New York: Oxford University Press.
_____. 1995. “The Social Impact of Adjustment Operations: An Overview”

Report no. 14381. Operations Evaluations Department, Washington,
D.C.
_____. 1996. Uganda: The Challenge of Growth and Poverty Reduction. A Coun-
try Study. Washington, D.C.
5
Rural Households: Incomes,

Productivity, and Nonfarm Enterprises
Klaus Deininger and John Okidi
During the past decade, Uganda’s economy has shown remarkable growth,
which has translated into a substantial reduction in poverty. For growth to be
sustainable and to reduce poverty in a sustainable fashion, it will be critical to
increase agricultural productivity and rural nonfarm employment. This is be-
cause about 80 percent of the labor force is concentrated in agriculture, but the
sector receives less than half of the total income. In addition, more than two-
thirds of the earned income of the poorest decile comes from agriculture. En-
abling the poor to accumulate additional human and physical capital and in-
creasing the returns to assets they already own through technical progress,
increased diversification, market integration, commercialization, and growth
of rural nonfarm enterprises will, therefore, be key elements of any strategy
aimed at equitable growth and broadly based poverty reduction. The purpose
of this chapter is to assess the extent of progress toward these goals and to
explore obstacles that need to be overcome. Data from three different house-
hold and community surveys were used, including the 1992/93 integrated
household survey, the 1993/94 monitoring survey, and the first round of the
1999/2000 national household survey (see appendix A at the end of the book).1
Use of the 1999/2000 Uganda national household survey would have not been
possible without the excellent performance of the Uganda Bureau of Statistics survey
team under Jackson Kanyerezi and James Muwonge, the careful data editing under
Tom Emwanu, and the contribution of Bart Minten in questionnaire design and enu-
merator training. The authors are deeply indebted to all of them.
1. Although enough observations (about 4,800 households) are available to make
inferences that are statistically representative at the regional level, note that all the
means discussed in this chapter refer to sample rather than population averages, be-
cause final weights are not yet available for the latter survey.
123
124 Klaus Deininger and John Okidi
This chapter first reviews major changes that occurred in the rural sector
between 1992 and 1999. It then analyzes the determinants of changes in house-
hold income using a panel of approximately 1,000 households that were in-
terviewed in both 1992/93 and 1999/2000. Finally, the chapter explores pro-
duction, input demand, and the establishment of nonfarm enterprises using
information from 1992/93 and 1993/94 surveys.
A Panorama of Rural Uganda

To gain a better understanding of the rural environment, this section intro-
duces the historical evolution of Uganda’s rural sector and then describes
changes in output structure, technology, operation of factor markets, and ac-
cess to infrastructure and other services that occurred between 1992 and 1999.
The purpose of presenting such a summary is to provide a descriptive over-
view of the some of the issues the rural population faces; the extent to which
these conditions have changed; and the scope for further improvements in
providing rural households with access to technology, services, and infrastruc-
ture. Indeed, while the descriptive evidence provides a clear indication that
there has been a change for the better, for example, as regards asset ownership,
it also indicates that significant interregional and rural-urban differences per-
sist, especially in access to infrastructure and technology.
Historical Background
During 1971–85 Uganda’s rural sector suffered from a combination of ill-
founded nationalization of assets, problems related to civil strife, and agri-
cultural price disincentives. These social and economic problems were due
to implicit and explicit taxation of export crops through monopoly market-
ing boards, the associated inefficiencies in input and output markets, and
overvalued exchange rates. The combined effect of these factors was to dis-
courage many rural producers from risking exposure to markets and make
them shift to food crop production and subsistence farming. For example,
cotton production declined from a peak of 87,000 tons in the early 1970s to
about 2,000 tons in the mid-1980s, as producing for the market was no longer
profitable. A similar decline occurred in tea and, although less dramatic, in
coffee. Price disincentives, withdrawal of financial intermediaries, lack of
infrastructure maintenance, and deterioration in the delivery of public goods
all led to the successive decapitalization of the rural economy, erosion of in-
ternational competitiveness, and a secular decline in productivity.
To reverse these trends, since the late 1980s the government has attempted
to reduce biases against rural producers. Coffee marketing and exports were
liberalized and direct export taxation was abolished (though reintroduced
temporarily during the 1994–95 coffee boom). Similar measures were taken
in the cotton sector, although progress has been slower. Agricultural output
grew at an annual rate of 4 to 4.5 percent in real terms during the last 10
Rural Households: Incomes, Productivity, and Nonfarm Enterprises 125
years. However, given the low level from which the sector started, this per-
formance is less impressive than one may think. In reality, agricultural growth
has been well below the average growth rate of the economy as a whole (6 to
7 percent), suggesting that a variety of structural impediments have thus far
limited the supply response of the rural sector (see Belshaw, Lawrence, and
Hubbard 1999 for a critical review).
Nevertheless, agricultural growth has played an important role in re-
ducing poverty. As shown by Appleton (chapter 4 in this volume), the inci-
dence of poverty decreased nationally from 56 percent in 1992 to 44 percent
in 1997. A decomposition analysis indicates that this was mostly due to
growth rather than to redistribution. Agricultural production for the mar-
ket was strongly correlated with the reduction in poverty: sectoral decom-
position shows that cash (export) crop farming households account for half
of the poverty reduction achieved between 1992 and 1997. This suggests
that greater agricultural commercialization could play an important role in
lifting the large majority of poor food crop and subsistence producers out
of poverty.
The importance of rural sector growth for poverty reduction is illustrated
by the fact that in 1999, agriculture accounted for more than two-thirds of
households’ earned income, and land accounted for about half the value of
the total asset endowment even of the poorest decile in the population. Any
measures that raise agricultural income and the returns to land would there-
fore yield significant and immediate benefits for the rural poor. It is against
this background that the next section discusses output structure, the opera-
tion of factor markets, and access to services in more detail.
Structure of Output and Technology

This section uses community survey evidence to highlight the changes in the
relative importance of main commodities grown by Ugandan households,
their yields, and the number of producers between 1992 and 1999.2 What
emerges is a pattern whereby, with the exception of cotton and a number of
fruits, traditional agricultural production in the north appears to have been
relatively stagnant, and in many cases, characterized by declining yields.
Other regions, especially the west, emerge as more dynamic, having diversi-
fied into vegetables, while at the same time expanding in traditional com-
modities such as maize, beans, millet, and cassava. Evidence also suggests a
major role for the transfer and adoption of improved technology. Technology
helps both to arrest diverging trends across regions (as in maize and beans,
tomatoes, and cabbage), and to halt declining yields, often through disease,
as in the case of coffee and matooke (plantain).
2. The available community survey data include more than 500 communities
across Uganda. A community typically corresponds to a village.
Building on the evidence on commodities, this study also examined spe-

cific factors associated with the use of technology and the functioning of fac-
tor markets. During the period under study, livestock ownership expanded
considerably, creating opportunities for a sustained increase in the use of
mechanical technology as well as the establishment of integrated systems of
production and organic manuring. Even though evidence points to increased
ownership and use of ox plows, their share remains extremely low. This sug-
gests that the scarcity of complementary factors of production, such as labor,
capital, and land, may constrain further expansion. The data also point to
extremely low levels of organic fertilizer use to improve soil fertility (about 3
percent of farms use inorganic fertilizer and about 6 percent use manure). At
the plot level, the data indicate a strong correlation between the adoption of
high-yielding varieties (HYV) and fertilizer use (the simple correlation coef-
ficient is 0.18).
CHANGES IN OUTPUT AND YIELDS. Changes in the output mix and in yields of
main commodities are important indicators of producer response to shifts in
incentives and opportunities in marketing and technology. They reveal whether
or not the expected diversification is actually occurring. At the same time, they
provide an indication of the adequacy of existing technology. This section uses
community-level information on 14 main commodities grown in Uganda to
make such inferences.3 It begins with staple crops and proceeds to export and
nontraditional commodities, exploring the share of communities where the
specific crop is grown;4 how the number of producers has changed since 1992;
whether yields increased or decreased during 1992–99; and the main reason
reported by communities for changes in yields (table A5.1).5
Maize, the main staple for the most of the population, is grown in 75
percent of communities countrywide, with 61 percent of villages having vir-
tually everybody grow maize. Maize cultivation expanded significantly be-
tween 1992 and 1999: 36 percent of communities reported an increase in the
number of producers and only 11 percent reported a decrease in the number
of producers. In 36 percent of communities in the east and 30 percent of com-
munities in the central region, maize yields increased, attributable to improved
management practices. By comparison, maize yields dropped in 60 percent
of communities in the north and 43 percent of communities in the east, with
the drops being attributed mainly to weather-related factors. In the north,
this appears to have led to a significant move out of maize cultivation. Data
3. The survey contains information on 20 commodities.

4. The categories are “by all or many”, “by some” (up to one half), and “by
none” of the producers.
5. Although the original answer for both the number of producers and yields
was given on a scale from one to five, these are collapsed into two categories to im-
prove the readability of table A5.1.
indicate that in 37 percent of communities the share of maize producers de-

creased, in marked contrast to the rest of the country. It is important to exam-
ine the extent to which this reflects the region’s comparative advantage, that
is, whether there is scope for producers to substitute for maize with other
commodities that are more profitable under local conditions. If such a substi-
tution is not profitable, adaptive research to expand varieties and/or tech-
niques used to grow maize would be needed.
As beans are often grown together with maize, trends observed in beans
were similar, including their almost universal importance. Only 20 percent
of communities reported that nobody plants beans, while in 64 percent of the
villages everybody grows them. All regions except the north showed marked
increases in the number of communities where beans were grown. Seventy
percent of the communities in the north reported a decline in the yields. At
the same time, in the west yields declined in 40 percent of communities but
increased in 30 percent of villages, suggesting that there may be gaps in tech-
nology that could be easily bridged.
In view of its drought resistance, millet is most important in the north,
where almost 70 percent of communities report that everybody grows millet,
followed by the west (60 percent), the east (33 percent), and the center (8
percent). Only 15 percent of communities in the north reported that nobody
grows millet. It is therefore surprising that about 20 percent of communities
in the north and east reported a decline in the number of millet producers,
compared with 43 percent of communities in the west reporting an increase.
This change in the relative importance of production appears to be caused
mainly by changes in yields, which were reported to have declined in almost
two-thirds of northern and one-third of eastern communities, but increased
in about one-third of western communities. In view of the crop’s drought
resistance, weather was almost universally mentioned as the main underly-
ing factor for yield decreases, a fact that would warrant attention.
Sorghum is most important in the west, followed by the east and the north,
while it is almost nonexistent in the central region. The number of producers
shows a moderate increase in the west, together with a moderate to significant
decrease in the east and north. Declining yields experienced in 31 percent of
northern communities (as compared with 21 percent of western ones) appear
to be the main reason for the reduced emphasis on this commodity in the north.
Groundnuts are of major importance in the north, the west, and the east,
but less important in the center. In contrast to the commodities discussed ear-
lier, groundnuts show a marked pattern of declining yields nationwide: about
one-third of communities in the east and west and two-thirds in the north
reported declining yields while only about 15 percent report yield increases.
Matooke was produced in about 50 percent of communities. The main pro-
duction areas are in the western region, where the crop was grown in 82
percent of communities (almost universally in 55 percent and by about half
in 26 percent). While of moderate importance in the central and eastern re-
gion, matooke was grown only in about 10 percent of communities in the north.
Production expanded in the western and central regions, but contracted in

the east and remained virtually constant in the north. Almost 60 percent of
yield decreases in communities in the west and 25 percent of yield decreases
in communities in central region were attributed to diseases or the weather.
While the commercial market for cassava is limited, it provides an impor-
tant source of calories for home consumption. Indeed, cassava is universally
grown in almost half of Uganda’s villages and by some producers in another
quarter of the country’s villages. Producers in the central region and the north
appear to have shifted out of cassava, whereas the number of producers in
the west and the east has increased over time. Yield declines appear to have
been most marked in the north (where two-thirds of communities reported a
decline) and the central region (45 percent), but were relatively equally bal-
anced with yield increases in the remainder of the regions.
Cultivation of coffee, Uganda’s main earner of foreign exchange, domi-
nates in the western, central, and eastern regions, but is nonexistent in the
north. Although the profitability of coffee was high, the geographic expan-
sion of coffee growing was limited to the east, where 16 percent of the com-
munities increased production and 12 percent of communities decreased pro-
duction. While changes observed in the west were moderate, 30 percent of
communities in the central region reported a decline in the number of coffee
producers (as compared with 7 percent that reported an increase). The major
reason appears to have been disease. Given the macroeconomic importance
of coffee and the forward and backward linkages in the economy, efforts to
reduce vulnerability to diseases, and where possible to expand cultivation,
have showed a high payoff.
Cotton, Uganda’s other main cash crop, is important mainly in the north
and the east, where about two-thirds and one-third of communities, respec-
tively, reported cotton cultivation. The sector has been characterized by a
long history of neglect, which over time has resulted in significantly reduced
output. The fact that the number of cotton producers has increased in half of
the communities in the north and a quarter of the communities in the east
indicates that the dislocations associated with the past have given way to a
more sustained path of consolidation and renewed growth. The expansion
of the area growing cotton appears to have been accompanied by technology-
driven yield increases in most communities, which is particularly encourag-
ing. Although data on total output and profits will be needed before more
definite conclusions can be drawn, the signs are hopeful.
Few national statistics are available on the importance of fruits and
vegetables, two categories of products that are often considered indispens-
able for moving Uganda’s agricultural sector up the value added chain.
While a survey of communities cannot substitute for a more detailed as-
sessment of Uganda’s comparative advantage, potential markets, and op-
portunities for expansion into agroprocessing, the new community-level
data suggest that the focus on traditional crops that characterizes Uganda’s
agricultural service is likely to miss out on an important element of region-

specific diversification.
For example, tomatoes, which were being grown in about 40 percent of
communities nationwide, have achieved a level of geographical coverage
greater than that of cotton and almost equal to that of coffee. The west clearly
dominated, with 10 percent of communities where virtually everybody grew
tomatoes, while 57 percent of communities in the west, 47 percent in the east,
22 percent in the center, and 16 percent in the north reported at least some
tomato producers. The number of producers increased in 15 percent of vil-
lages and decreased in 4 percent of villages nationwide. Yields showed a
divergent pattern whereby a significant increase in the central and, to a lesser
extent, the eastern region was counterbalanced by a marked drop in yields in
the west. The adoption of the improved management techniques that are
reported to have caused the yield increase in the central region could be trans-
ferred to the west. Improved management techniques could smooth the path
for future expansion of production.
Although grown in a slightly more limited number of communities than
tomato, cabbage is another high-value product that has recently attained sig-
nificance. While the western and eastern regions still dominated in cabbage
production, the center appears to be catching up and, in a pattern that ap-
pears to be similar to the one observed for tomatoes, these regions registered
considerable increases in yields (which were universal for all the communi-
ties where the crop is produced). Compared with this increase in yields, many
communities in the west experienced a disease-related decrease in yields.
Tree crops that are relatively drought resistant might provide an opportu-
nity for expansion of production in the north that, according to the 1999/2000
community survey data, seems to have done rather badly in terms of overall
agricultural performance, with the exception of cotton. Production of man-
goes is clearly dominated by the north, with near-universal coverage in 43
percent of communities and some coverage in another 25 percent of communi-
ties. Only the western region, with 20 percent near-universal coverage and
some coverage in 10 percent of communities, approaches this level of cover-
age. Currently, mangoes do not seem to provide a basis for sustainable expan-
sion. Contrary to conditions in the west, where the number of producers in-
creased in 14 percent of communities, the number of producers decreased in
other regions. The situation is similar with respect to oranges, which were grown
universally in 20 percent and to some extent in 37 percent of northern commu-
nities. Disease-related declines in yields that were observed in more than half
of the communities (that is, virtually everywhere the crop was grown) point
toward a significant deficit in terms of technology. As such technology should
be easily available from other countries, more detailed examination of the rea-
sons underlying its limited current adoption, as well as the scope for better
cultural practices, would be important. An examination of these issues might
open up opportunities for nontraditional agricultural growth in the north.
Passion fruit is another recently introduced high-value crop on which

few nationally aggregate production estimates are available.6 Evidence at the
community level suggests that the crop was almost universally grown in
about 9 percent of communities in the west, and was of some importance in
16 percent of communities nationwide. The number of producers increased
in 11 percent of communities in the west and 9 percent in the north. While
yield increases were reported from 11 percent of communities in the north
attributed mainly to improved labor use, 19 percent of western communities
experienced a weather-related yield decline.
USE OF TECHNOLOGY. In addition to being an important investment item in

traditional agricultural societies, livestock ownership can affect agricultural
performance by increasing producers’ ability to use animal traction and me-
chanical technology to expand the area cultivated, perform necessary activi-
ties in a more timely manner, and through provision of manure maintain soil
fertility and make use of higher-yielding varieties. The latter is relevant, be-
cause at least part of the decline in yield observed in some of the commodi-
ties may have been caused by lack of investment in soil improvement through
either organic or inorganic fertilizer. Moreover, enabling producers to ex-
pand their cultivated area beyond the current average farm size of 1.5 to 2
hectares per household will require a shift from hand-hoe technology to ani-
mal traction. This shift is important, as some regions of Uganda still have
potential for further expansion of cultivated areas.7
The data point to an increase in the ownership of livestock in the 1990s
(table A5.2, panel 1). During 1992–99, the number of households owning live-
stock increased from 11 to 20 percent for cows, 4 to 7 percent for bulls, and 1
to 2 percent for oxen. The increase was distributed equally across regions,
suggesting a broad pattern toward higher levels of investment in agricul-
tural technology. The value of livestock owned increased by 36 percent (from
U Sh 0.74 million to U Sh 1,004 million per household), which is a substantial
investment given that a high share of households did not own livestock at all
in 1992. Although overall levels of plow ownership are still low, and the rate
of expansion was much slower than in the case of livestock, 4 percent of
producers, compared with 2.5 percent in 1992, were reported to own plows.
The eastern and northern regions reported that approximately 7 percent of
6. Given the focus of most conventional production surveys on traditional com-

modities, it is unlikely that reliable information on the economic importance of any
recently introduced high-value crops exists at the moment. While they were at least
included as separate categories in the 1999/2000 national household survey, it is not
clear whether the training of enumerators was sufficient to make them probe for such
nontraditional crops in each case.
7. Estimates put the potential for increasing the cultivated area from 5 million
hectares in 1992 to as much as 18 million hectares (World Bank 1996).
producers owned plows, the highest levels of plow ownership among the
regions. Note, however, that 70 percent of communities nationwide (48 per-
cent in the north) reported that nobody uses ox plows. Given the relative
land abundance and the relatively small areas cultivated in the north (which
suggests scope for greater use of animal traction to increase the area culti-
vated), it is particularly surprising that plow use seems to be slightly lower
there than in the east, where about 15 percent of communities reported “many”
users of ox plows. In addition, even though ox plow use increased in about
20 percent of eastern and 35 percent of northern communities, its use de-
clined in others. Compared with ox plows, tractor use decreased rapidly in
most of the communities (22 percent showed a decrease and only 4 percent
showed an increase). The decreased tractor use probably reflects a legacy of
unsustainable mechanization in earlier years.
As illustrated in panel 4 of table A5.2, the share of food crop area planted
in HYV tripled during the period, albeit from a very low level. Growth oc-
curred fairly uniformly across regions, with the level of HYV use being high-
est in the eastern region. Community data suggest that, in addition to an
increased number of producers who used these varieties within specific vil-
lages, the number of HYV also spread geographically. However, in 43 per-
cent of communities nationwide (70 percent in the north), there was still no
use of HYV, and only in about 7 percent of communities were HYV used by
half or more of the population.
In line with the limited spread of HYV, the use of fertilizer (a strong comple-
ment to HYV) was low, with an average of 3 percent reporting use, based
upon a reported use of 5 percent in the north to 2 percent in the more fertile
west. More producers used pesticides than fertilizer (7 percent nationally,
ranging from 11 percent in the center to 3 percent in the west). Also, the ap-
plication of manure to improve soil fertility was slightly higher than that of
fertilizer, with 6 percent nationally reporting manure use. The large interre-
gional variation (from 1 percent of producers using manure in the north to 13
percent in the center region ), despite fairly uniform levels of livestock own-
ership, suggests that further examination is warranted with regard to the
determinants of the use of investments to enhance soil fertility.
Factor Markets
Ability to access credit is important to finance the expansion of productive
activities, to obtain working capital, and to insure against risk. The data show
a large increase in the share of producers who have access to credit, from 8 to
16 percent between 1992 and 1999. While this information suggests that the
past contraction of the credit system has been largely reversed, it does not
imply that further improvements, both on the supply and the demand side,
could not yield significant economic benefits. The majority of credit was used
for production rather than consumption. About one-third of producers in
the sample had not obtained credit, either because the bank was too far away
or because the producers lacked collateral. Due to a combination of highly

covariate risks and high levels of poverty, the scope for informal credit in the
northern region appears to be particularly limited, implying that formal in-
stitutions are much more important in the north.
Land rights and land markets link credit, productive efficiency, and pov-
erty. Obviously, in view of the findings, the scope for secure, formal land rights
to help producers access credit appears to be important. Moreover, if the non-
farm economy becomes more vibrant, the scope for realizing efficiency gains
from better functioning of land rental markets will increase significantly. In-
deed, the greater importance of off-farm employment could underlie the rapid
expansion of land rental markets observed between 1992 and 1999.
CREDIT MARKETS. Data for 1999 suggest that households’ access to credit
improved considerably since 1992. In 1999 about 16 percent of households
nationwide had access to credit, ranging from 24 percent in the west and 6
percent in the north (table A5.3, panel 1). Comparing this with the 9 percent
of households who had an outstanding loan in 1992, the data suggest that
access to credit at the household level has expanded considerably.8 The fact
that the number of households having access to credit now is almost equal to
those who ever had access to credit confirms this conclusion.9
To determine whether producers are credit constrained, that is, whether
unsatisfied demand for credit exists under present conditions, a closer look
was taken at the reasons given for nonuse of credit. Table A5.3, panel 1 shows
that 42 percent did not apply because they did not need credit, and 19 percent
did not apply because they did not know how to apply. Taking these two
groups together still leaves 40 percent who appeared to have creditworthy
projects, but did not apply.10 Only 6 percent failed to apply because interest
rates were too high, suggesting that the cost of credit was no longer the most
important factor limiting access to and use of credit. By contrast, 22 percent
did not apply because they lacked security (even though the majority owned
8. As informal credit was explicitly included in 1992/93, there should be little

bias due to differences in the survey methodology, except possibly differences in the
extent of enumerator training.
9. In the 1992 survey, only 9 percent of households nationwide (4 percent in the
northern region) had an outstanding loan during the survey period, with sharp dif-
ferences in mean loan sizes between urban (U Sh 242,000) and rural (U Sh 66,000)
areas. Moreover, even though about half the number of loans was made in rural ar-
eas, these areas received only about one-tenth of the total available credit, most of
which was concentrated in the central region, which is close to urban centers. From a
sectoral perspective, loans were heavily concentrated in trade (44 percent of loans as
well as amounts), services (19 percent), and livestock farming (15 percent). Crop farm-
ing (12 percent) ranked much lower.
10. Although households that do not know where to apply may be credit con-
strained, they are included in the category of nonconstrained producers to err on the
conservative side.
land and all owned other assets). An additional 12 percent failed to apply
because the bank was too far away. This suggests that about one-third of the
producers who did not use credit would, at a given cost, appear to be able to
benefit from an increased ability to use existing assets as collateral and from
expansion of financial infrastructure.
Indeed, less than half of the communities nationwide (44 percent) had
access to formal credit, with considerable regional differences reported (table
A5.3, panel 2). The availability of formal credit was relatively high in the
west (65 percent of communities) and very low in the north, where only 20
percent of communities had access to formal credit. The government’s
Entandikwa scheme continues to be the most widely available source of for-
mal credit and, therefore, of loans, followed by banks and cooperatives.11 In
the north, there was not a single community with a bank branch. The second
half of panel 2 illustrates sources that were available in the past, but have
since closed. Clearly, many communities where cooperatives have in the past
provided loans are no longer doing so. In 13 percent of communities,
Entandikwa schemes closed down as well. The majority (55 percent) of those
who obtained credit received it from relatives or community funds, followed
by cooperatives and government sources (21 percent), nongovernmental or-
ganizations (16 percent), banks (5 percent), and other businesses (3 percent).
As mentioned earlier, the pattern in the north differs markedly from that in
other regions: relatives were considerably less important than elsewhere.
The survey indicates (table A5.3, panel 3) that a large share of loans (45
percent) was used to establish nonagricultural enterprises, followed by ex-
penditures on education and health (24 percent), purchase of inputs (15 per-
cent), agricultural investments in land and livestock (9 percent), and house-
hold goods (7 percent). Note the regional differences, especially between the
north and other regions. In the north, the emphasis on nonconsumptive use
of credit was even more pronounced than in the other regions.
LAND RIGHTS AND LAND MARKETS. Land rights and land markets are important
for a number of reasons. First, land to which secure property rights (as nor-
mally documented through a formal title document) exist can serve as collat-
eral for formal credit. Second, land markets are important to enhance agricul-
tural productivity and household welfare by shifting land toward its most
productive use, either through sales or through rental.12 Finally, secure land
rights are normally a precondition for households to be willing to undertake
11. Entandikwa is a government soft loan scheme targeted at the poor with the
primary objective of providing start-up capital for household business enterprises.
The credit program was started in the mid-1990s as a revolving fund to facilitate and
move households out of poverty. The program has suffered from a low recovery rate
for several reasons, including people’s view of the fund as a government handout.
12. The difference between sales and rental markets to land is explained, for ex-
ample, in Deininger and Binswanger (1999) and Deininger and Feder (2000).
the investments necessary for sustainable increases in land productivity and/

or to maintain soil fertility.13 Deininger (2000) demonstrates the importance of
land rights for investment to enhance soil fertility, for land values, and for land
market participation, and shows that more secure land ownership increases
the probability of applying manure (but not fertilizer), the value of the land,
and farmers’ propensity to rent out land. Building on this finding, this section
focuses on the extent to which land rental and land sales markets function and
on the aggregate incidence of land conflicts.
The land rental market helps equalize land access. In 1999, the operation
of rental markets helped to reduce the Gini coefficient from 0.57 for owned
land, a figure that puts Uganda in the middle league of countries interna-
tionally, to about 0.50 for operated land.14 In addition to improving access to
land, land rental markets are also likely to make a contribution to higher
allocative efficiency. Panel 4 of table A5.3 indicates that the participation in
land rental markets in the central region was high, with 25 percent of pro-
ducers having reported to have rented in land and 12 percent having rented
out land in 1999. Note that much of the activity in land rental markets was of
recent origin. Even considering only households that cultivated land in 1992,
participation in rental markets more than doubled between the two peri-
ods.15 The share of households renting land increased from 10 percent in 1992
to 24 percent in 1999, with the greatest increase observed in the east and the
west. Similarly, the share of households renting out land increased from 5 to
12 percent in the central region, with the highest absolute increase in the east.
Complementing this with information on the number of communities where
land rental was practiced, the only region where a significant increase in this
figure was observed was the north (from 9 to 25 percent).
Information on land sales was only available at the community level (table
A5.3, panel 5). This information shows that land prices differed markedly across
regions, with the west (U Sh 526,840 per acre) being the highest and the north
(U Sh 56,860 per acre) being the lowest. Not surprisingly, land sales transac-
tions were rare in the north where they were reported in only 13 percent of the
13. There is some controversy as to the importance of land title in the African
context in general (see Besley 1995; Brasselle, Frédéric, and Platteau 1997; Platteau
1996), and for Uganda in particular (Baland and others 1999). See Deininger (2000)
for a more elaborate discussion and econometric evidence on the importance of land
rights in Uganda.
14. The Gini coefficient is a widely used measure of inequality that varies be-
tween a value of one (for perfect inequality) to zero (for perfect equality). Land Gini
coefficients are in the 0.8 to 0.9 range in Latin America and in the 0.4 to 0.5 range in
Asian countries.
15. Doing so avoids the need to count households that did not exist in 1992, but
which obtained land either through rental or through a pre-inheritance transfer while
parents were still alive between 1992 and 1999.
communities, compared with 64 percent in the central region, 63 percent in the

west, and 58 percent in the east. A number of communities (11 percent) re-
corded more than 5 land transactions per year. Also, the activity of land rental
markets increased in about 40 percent of the communities during 1992–99. More
detailed investigation at the household level will be needed to make infer-
ences on the impact of land sales on efficiency and welfare.
Land conflicts were reported by 52 percent of communities (table A5.3,
panel 6). While land conflicts were virtually absent in the north (where they
were reported only in 16 percent of communities, they were of considerable
importance in the west (70 percent), the east (58 percent), and the central
region (51 percent). In addition to having the highest incidence of land con-
flicts, the west also appears to be characterized by a considerable increase in
land conflicts: in 21 percent of communities, land conflicts increased signifi-
cantly, and in 15 percent they increased somewhat. One of the distinguishing
features of the central and western regions is that most land is held under
mailo tenure, which indicates that there is considerable scope for improving
tenure security on such lands.16
Infrastructure, Services, and Social Capital

Regression estimates reported by Larson and Deininger (in chapter 6 in this
volume) suggest that when transaction costs were reduced, the extent to which
producers participated in the market was affected by the infrastructure and
other public services. Examination of the 1992/93 and 1999/2000 survey data
indicates that, both at the household and the village level, the extent of changes
in access to extension and infrastructure has been modest. The ease of linking
to infrastructure is illustrated in table A5.4, panel 1, which gives the average
time taken (in minutes), using the most common means of transport from a
community in each of the regions to different infrastructure items in 1999. The
average household had to spend 25 minutes to get to the next feeder road, 75
minutes to reach a tarred road, an hour to reach a bus or a truck that could
transport agricultural produce, and 48 minutes to reach a taxi. Access to other
services also required considerable amounts of time: to reach a hospital took
56 minutes, a factory employing more than 10 people took 63 minutes, and a
post office or telephone took 70 and 75 minutes, respectively. The table also
illustrates the high level of regional variation, and that changes in access to
infrastructure have still been quite limited. Households in the north generally
had to spend about double the time of the national average: 65 minutes to
reach the next feeder road and more than 2 hours to reach the next tarred road,
truck, telephone post office, and hospital. According to the group of village
leaders interviewed in the community survey, infrastructure access improved
16. Mailo is a form of freehold tenure that was awarded to local kings and no-
tables by the British when they colonized the country in 1900 (Brett 1973).
in a limited number of communities between 1992 and 1999, with 7 percent at

the national level reporting improved access. Moreover, improvements in in-
frastructure appear to have been concentrated in the east and central regions
(12 and 10 percent, respectively). Only 1 percent of communities in the north
experienced improvements in infrastructure during the period.
One of the explicit goals of agricultural extension is to help farmers cope
with the challenges posed by an environment where fast-changing crop pests
and diseases pose a consistent threat to production and welfare. In this con-
text, it is encouraging to note that coverage with extension services increased
from 11 percent of farmers in 1992 to 17 percent in 1999 (table A5.4, panel 2).
This increase appears at the household level to have been highest in the north,
resulting in relatively equal regional coverage in 1999. In the west, the pri-
vate sector was of far greater importance than public extension agents. Ac-
cording to community-level information, extension workers were the main
source of information in 31 percent of communities in the east, 21 percent in
the west, and 17 percent in the central region, but in none of the communities
in the north. In virtually all the northern communities (96 percent) the radio
was the main source of information on agricultural practices (table A5.4, panel
2). Also, in all regions households relied more on the radio than on extension
workers for information on technology. One reason for this may be that, de-
spite the apparent expansion of extension services’ coverage, the vast major-
ity of producers meet the extension agent only once a year. Only 5 percent of
producers nationally, according to the survey, have had contact with an ex-
tension worker more than twice a year, and this percentage has remained
virtually constant throughout the period.
At the village level, about 64 percent reported that the community was not
at all reached by extension services (table A5.4 panel 3). The majority of pro-
ducers were reached in about 21 percent of communities in the west and 1
percent in the north. Neither community nor individual data indicate any gen-
der bias in such access.17 A regionally distinct pattern of expansion and reduc-
tion of extension access is apparent: extension access increased in 31 percent of
communities in the west and 27 percent in the center, whereas the east and
north seem to have been characterized by large-scale withdrawal. Access to
extension services decreased in 31 percent of eastern and 20 percent of north-
ern communities.18 All these observations may be useful, together with the
importance of having access to timely information at different stages in the
production process and strategies to complement attention to traditional ex-
tension with mass media and private sector sources. For example, in 41
17. Data from the 1999/2000 national household survey indicate that access to
extension information was virtually equal between male and female producers.
18. Note that this information, which is given for the same community at two points
in time, does not suffer from limitations regarding statistical representativeness.
percent of communities in the west, the private sector had overtaken both the
radio and the public service as the primary information source.
Access to veterinary services appears to be better than access to extension
services (table A5.4, panel 4). Of the 82 percent of communities that reported
cattle ownership, 66 percent had veterinary services available (the lowest
coverage was observed in the north, with 48 percent). The public sector still
provided the majority of these services (70 to 80 percent). Coverage with
artificial insemination was low (12 percent of communities) and confined to
the central (23 percent) and eastern (19 percent) regions.
Issues of governance, violence, and social capital affect economic activity
in low-income communities where the scope for formal contract enforcement
is limited and, as a consequence, many economic exchanges rely on trust and
reciprocity, often within informal kinship networks. While there were few
indicators on governance, the data point to a marked increase in the inci-
dence of civil strife, which affected about 8 percent of households in 1992
and 13 percent in 1999 (table A5.4, panel 5). The pattern of increase was re-
gionally uneven; the largest increase (from 8 to 18 percent) was noted in the
west. Compared with other regions, civil strife in the north remained con-
stant, affecting 10 percent of households in both periods. Similarly, the num-
ber of households affected by property thefts increased from 13 to 20 per-
cent, while physical attacks remained almost constant, increasing in the
aggregate from 7 to 9 percent from 1992–99.
To construct an indicator of social capital endowments, households’ re-
action to exogenous shocks during the last seven years was evaluated.19
This indicator is defined as the percentage of households which, having
experienced a shock, received help or gifts from community members. Re-
sults indicated that the distribution was fairly equal across the country, with
between 30 and 40 percent of households receiving help to cope with shocks
and with interregional and intertemporal changes being relatively minor
(table A5.4, panel 5).
Intertemporal Changes in Household Income

While the foregoing analysis provides an interesting account of changes in
the productive and social environment that can give useful insights for gov-
ernment policy, it does not establish a clear link between households’ pro-
ductive capacity and their overall well-being. This section aims at providing
such a link by analyzing the determinants of growth in incomes at the house-
hold level during 1992 and 1999. The main findings are that growth in Uganda
19. The shocks considered include an illness of one month or longer (56 percent),
abandonment or separation (9 percent), loss of permanent job (6 percent), and loss of
productive assets (22 percent).
has been propoor, that in a liberalized environment the opportunities pro-

vided by households’ endowments of physical capital and their access to
electricity and financial services were of great importance, and that unob-
served region-specific effects still had a large impact.
The Panel Data and Descriptive Evidence

To make inferences about the factors that have contributed to higher rates of
income growth, over and above mere cross-sectional correlation, regression
analysis was used for the 953 panel households for which information was
available from both the 1992/93 and the 1999/2000 surveys.20 While using
data from the same households enabled making inferences on growth, in
large household surveys that contain a panel element, attrition may be high
and generally follows a systematic pattern (Deaton 1997). Indeed, a probit
regression for attrition (not reported) indicates that mobility and thus attri-
tion was much higher for households located in urban areas (7 percent), that
had access to electricity (6 percent), whose head was younger (each addi-
tional year of age increases the marginal probability of staying in the sample
by 0.5 percent), who had fewer children below the age of 14 (each child in-
creases the marginal probability of staying in the sample by 1.8 percent), and
more people above 60 (each older person decreases the probability of staying
by 3.9 percent). Attrition rates were also slightly higher (3 and 5 percent,
respectively) in the east and north.
Table 5.1 summarizes income sources of panel households and their evo-
lution over time. In 1992 and 1999 households received about 72 percent of
their income from own-agricultural enterprises. By contrast, the share of in-
come from agricultural wages declined considerably, from 9 to 4 percent,
whereas income from nonagriculture, both in its wage and its nonwage com-
ponent, increased. Across regions, the most marked change observed was a
drop in the importance of agricultural self-employment income from 81 to 72
percent in the north, accompanied by an increase of nonagricultural enter-
prise income from 5 to 13 percent. Similar increases in nonfarm income were
observed for the remainder of the regions, although agricultural enterprise
income in these regions remained more stable.
Figure 5.1 depicts the cumulative distribution of earned income in both
years for panel households. The distinct shift of the distribution to the right
indicates an unambiguous improvement in income levels (consistent with
second-order stochastic dominance). Thus, even though one cannot exclude
the possibility that some households saw their income drop during the period,
20. Income instead of expenditure is used here to be able to decompose income

by source (agriculture and nonagriculture). Given that income and expenditure dis-
tributions are relatively similar in both years, it is unlikely that use of expenditure
would lead to radically different results.
Table 5.1. Income Sources for Panel Households by Region, 1992 and 1999
(percent)
National Central Eastern Northern Western

Category 1992 1999 1992 1999 1992 1999 1992 1999 1992 1999
Own agricultural enterprise 71.3 72.0 71.6 72.6 65.4 66.4 80.5 71.6 72.3 75.9
139
Agricultural wages 9.0 4.1 9.1 4.3 8.0 4.0 9.8 4.7 9.4 3.6
Nonagricultural enterprise 10.1 12.7 10.7 12.9 14.8 16.1 5.0 12.6 7.7 10.1
Nonagricultural wages 9.7 11.2 8.7 10.3 11.8 13.5 4.7 11.2 10.6 10.4
Number of observations 911 274 233 102 302
Note: Only earned income is considered. Remittances, rental income, and so on, are therefore not included.
Source: Authors’ calculations based on the 1999/2000 national household survey and the 1992 integrated household survey.
Figure 5.1. Cumulative Distribution of Income, 1992 and 1999

Cumulative proportion of population
1.00
0.75
1992
0.50 1999
0.25
0
10 11 12 13 14
Log of annual adult equivalent income (U Sh)
Source: Authors’ construction from the 1992 and 1999 household survey data.
income levels in the aggregate showed a marked increase. The mean annual
increase in household income, which was used as the dependent variable in
the regressions reported later, was about 7 percent, indicating a considerable
increase in overall household welfare.
Analysis of Income Growth

To identify initial conditions that are associated with higher subsequent income
growth, and in particular, whether household- or location-specific characteris-
tics are quantitatively more important, we regressed the annualized rate of in-
come growth at the household level on initial household characteristics, com-
munity characteristics, and a set of regional or provincial dummy variables.21
Results from the regressions are summarized in table A5.5 where, to im-
prove readability, the dependent variable is the growth rate of income in
percentage terms.22 A cursory look at the table reveals that initial household
21. As misreporting of income would imply that outliers could introduce consid-
erable error into the dependent variable, we report results from a least absolute de-
viation (LAD) estimator rather than from ordinary least squares (OLS). The former
estimation technique gives lower weight to outliers, thereby reducing the possibility
that extreme observations will have an unduly strong impact on the results. Results
from LAD are very similar to those obtained by OLS (the latter are not reported here,
but are available from the authors).
22. To illustrate the quantitative impact of certain independent variables in subse-
quent discussion, their values are assumed to shift from the 25th to the 75th percentile.
characteristics are important. If the household head has one additional year
of education, the increase in annual income growth is estimated to be be-
tween 0.55 and 0.63 percentage points. Shifting a household from zero years
of education (the 25th percentile) to seven years of education (the 75th per-
centile) would increase annual income growth by 3.9 to 4.4 percentage points.
One could expect households with younger heads to be able to adjust more
swiftly to changing economic circumstances and show higher levels of in-
come growth; bridging the interquartile range (25 and 48 years) would be
expected to increase growth by between 3.2 and 2.6 percentage points. Con-
trary to the opinion (and the evidence from simple cross-sectional correla-
tions) that a higher initial number of household members is associated with
lower levels of per capita income, households with more members (initially)
saw higher subsequent income growth because of higher levels of family
labor or the potential for consumption smoothing through informal family
networks. The magnitude of the estimated coefficient is significant; a shift
from 2.38 to 4.48 adult equivalents would be expected to increase income
growth by 1.5 to 1.7 percentage points.
Including households’ initial asset endowments and income levels in the
regression demonstrates that, despite the positive correlation between in-
come and assets (0.13), the two variables have very different effects in the
long term. While there has been divergence in assets, households appear to
have converged strongly in income. In other words, households with higher
levels of initial assets experienced higher levels of income growth, whereas
households with high levels of initial income experienced lower subsequent
income growth. This would imply that, during the period under review, the
character of the growth process gave households with low initial levels of
income opportunities to catch up, although possession of physical assets
and—more important from a quantitative point of view—human capital,
greatly improved their ability to do so.23 To illustrate the magnitude of the
associated effects, note that the difference in assets between the 25th and the
75th percentile of the asset distribution would have affected income growth
by less than a percentage point. By contrast, an equivalent shift in the income
distribution would have had a dramatic impact of about 7 percentage points
on subsequent income changes.
To examine whether, as is often asserted, gender bias posed structural
obstacles for female households, two dummies were included, one if a house-
hold were headed by a female in 1992, and one for widowed households.
Contrary to a popular perception and in line with findings in the recent lit-
erature (for example, Appleton 1996), there seemed to be little evidence of
bias against female households. To the contrary, female headship emerged as
a positive, although not statistically significant, characteristic, confirming the
notion that women did enjoy opportunities in the trade and service sectors
23. Indeed, a dummy for households that were below the poverty line in 1992 is
highly significant and positive.
(Kwagala 1999). Widowed headship was negative as expected, but not sig-
nificant at conventional levels of confidence.
As a proxy for access to infrastructure at the household level, a dummy
variable was included. That variable equaled one if the household were con-
nected to electricity in 1992. The magnitude of the coefficient is quite large,
although it was significant at the 10 percent level only in one of the equations.
The three location-specific characteristics included are the distance to
public transport in 1992, whether the community had access to a bank in
1992, and a rural dummy. The rural dummy was positive (although insig-
nificant), suggesting that policy-induced biases against rural areas were re-
duced in 1992–99. Distance to transport was negative (although insignifi-
cant). Access to banks emerged not only as the most significant, but also as
quantitatively important (2.2 percent) in the regression with regional dum-
mies. The significance of the coefficient decreased once district dummies are
included. One would expect this result, because within districts there was
much less variation in access to banks, so that part of the impact was ab-
sorbed in the district-specific intercept.
Household characteristics, in particular education, played an important
role in income growth. Within a sound macroeconomic framework that pro-
vides incentives to the private sector, raising the population’s levels of edu-
cational attainment appears as an important means of raising income growth,
helping households overcome structural disadvantages, and reducing pov-
erty. At the same time, given the significance of initial asset levels, any mea-
sures that would improve the asset position of the poor, for example, by
strengthening property rights to resources they already own, could have a
significant impact on poverty.
While the analysis suggests that observed location-specific characteris-
tics are less important than household characteristics, we also noted the mag-
nitude and statistical significance of the regional dummies for both the east-
ern and northern regions. In these two regions annual income growth would
be expected to be 4.2 to 4.3 percent lower than elsewhere in the country. This
points to the presence of unobserved factors that have a profound impact on
subsequent growth. Exploring such factors in more detail would be an inter-
esting topic for future analysis.
To summarize, in line with the analysis of consumption poverty (chap-
ter 4 in this volume), growth appears to have been overwhelmingly propoor
during 1992–99. Households who had lower initial income saw consider-
able increases in their income. At the same time, the eastern and the north-
ern regions appear to be characterized by structural barriers, for example,
climatic endowments and access to technology, not directly related to ob-
servable community attributes. This suggests not only a need for further
analysis of the nature of these differences, but also a more comprehensive
and integrated approach to promoting growth in these regions that links
improved technology and nonfarm employment. The importance of finan-
cial infrastructure suggests that mechanisms at the household level (for
example, expanding the range of assets that can be used as collateral) and
at the community level could be important.
Agricultural Productivity and Nonfarm Enterprises

More detailed analysis would be necessary to test the extent to which the
factors identified earlier, that is, households’ education and physical assets,
access to financial infrastructure, and technology, are relevant to the growth
of agricultural productivity. Such analysis is not yet possible, because com-
plete data on agricultural production will only be available when the two
rounds of the 1999/2000 survey of crops will have been completed. How-
ever, data from earlier household surveys can be used to examine both deter-
minants of agricultural productivity and the start-up of rural nonfarm enter-
prises. The rationale for including the latter is that, as a large and growing
literature has demonstrated, complementing agricultural with nonfarm in-
come offers many advantages and a potential for sustained growth.24 At the
same time, credit and output market imperfections and households’ endow-
ments are likely to have similar effects on the scope for agricultural invest-
ment and for diversification into off-farm activities.
Stylized Facts
At least three stylized facts characterize rural areas in Uganda. First, informa-
tional imperfections give rise to high levels of credit rationing. Second, trans-
action costs drive a wedge between buying and selling prices for different
commodities, thereby generating a wide margin within which it is economi-
cally rational for producers to remain self-sufficient. Third, households’ en-
dowments of human and physical capital are important not only from an effi-
ciency point of view, but also for their ability to access markets.
Credit market imperfections have implications for the use of recurrent
inputs in agriculture as well as for investment in nonfarm activities. Even if
24. The ability to complement agricultural incomes with nonagricultural enter-

prise activity is important for households to improve their ability to smooth consump-
tion; reduce their exposure to risk and vulnerability (Reardon and Taylor 1996); and
facilitate more efficient use of family, and especially female, labor during agricultural
slack periods (Lanjouw and Lanjouw 1997). Rural nonfarm activity has been shown to
be an important determinant of regional economic growth and households’ ability to
escape poverty in Asian countries such as China, India, and Thailand (Hayami 1998),
and in South Africa and Zambia (Hazell and Hojjati 1995). Better linkages between the
farm and nonfarm economy are believed to be important for broader development
and have been argued to be of particular relevance in a predominantly agriculture-
based economy such as Uganda (Bigsten and Kayizzi-Mugerwa 1995). Income from
nonagricultural sources can also serve to generate funds for agricultural investment,
especially where access to credit is limited (Reardon and Taylor 1996).
starting up a nonfarm enterprise (or the use of productivity-enhancing pur-

chased inputs) would allow a household to increase the returns to all factors
of production, doing so normally requires a minimum amount of liquidity
or access to credit. Farmers who are not credit constrained will have a level
of purchases of productive inputs or investment in nonfarm enterprises that
will be closer to the optimum than those who are credit constrained. Credit
constraints are affected not only by asset ownership, but also by proximity to
financial services. Hence, in addition to households’ levels of wealth (to be
used either directly or as a collateral) and education, lack of access to finan-
cial infrastructure could reduce input use and investment in nonfarm enter-
prises below the socially optimal level.25
Transaction costs in output markets that arise, among others things, from
distance to infrastructure, drive a wedge between purchase and sales prices
of agricultural commodities. That difference in prices makes it rational for
producers to remain self-sufficient, implying that price incentives will not
affect their behavior and the shadow price of different factors may deviate
significantly from what a commodity would command in the market.26
Households’ asset endowments will, in line with the foregoing discussion
on credit constrains and assets, and when markets for land, labor, or capital are
imperfect, directly affect the level of agricultural input use and longer-term
investment. For example, if, through the ability to use them as collateral, own-
ership of assets is an important determinant of credit access, ownership of
even nonproductive assets should affect the intensity of use of purchased in-
puts for credit constrained (but not credit unconstrained) farmers.
To explore these issues empirically, we used three approaches here. First,
to provide insight concerning the optimality of input use, a production func-
tion was estimated that included traditional inputs (own and hired labor,
seeds, fertilizer, and other inputs) plus other productivity-enhancing factors
such as education and agricultural experience. Coefficients from this pro-
duction function were used to indicate not only the impact of household
25. Credit unconstrained farmers will equate the marginal value product of each
of the inputs (hired labor, fertilizer, and home-produced seeds) to its market price.
Consequently, fertilizer will be applied optimally, that is, exactly to the point where
its marginal return equals the market price. Transaction costs in output markets in-
crease the amount of seeds consumed and/or used as an input to agricultural pro-
duction over and above the optimum without such transaction costs, irrespective of
whether or not a farmer is credit constrained.
26. Output as well as market and price risk could explain deviations from profit-
maximizing input quantities as well. However, it is difficult to construct a model that
would explain the pattern of overapplication of one and underapplication of another
input. If output or market price risk is a concern, farmers should store their wealth in
a less risky asset than putting seeds into the ground.
characteristics on agricultural productivity but, more interestingly, to make

inferences on the degree to which input is optimal.27
Second, to identify whether credit constraints affected input use demand
functions for different types of inputs (labor, seeds, and a fertilizer and pur-
chased seed combination) were estimated. This allowed us to test to what de-
gree these variables were affected by endowments rather than policy-related
factors. If credit market imperfections are an important determinant of demand
for purchased inputs (by increasing shadow prices for capital), exogenous capi-
tal constraints should enter demand functions for purchased, but not for home-
produced, inputs. Similarly, it is possible to identify the impact of availability
of government services and other facilities on input demand.
Finally, a probit equation for start-up of nonagricultural enterprises was
estimated. Clearly, households’ endowments with physical and human capi-
tal, as well as community characteristics, would be expected to affect such
investment. In addition, if, as hypothesized, the availability of financial in-
frastructure affects households’ ability to obtain credit for investment and
working capital, households located closer to, say, banks, should be more
likely to invest in and to continue to operate nonfarm enterprises.
Agricultural Production and Productivity

The estimation of the production function used data from 528 panel house-
holds that were interviewed in the 1992/93 integrated household survey
and the 1993/94 monitoring survey (see Deininger and Okidi 2000 for more
detailed description of the data). Descriptive statistics were similar to the
ones discussed earlier, and thus are not reported separately. Mean annual
output value for the sample was about U Sh 190,000, ranging from U Sh
221,000 in the central region to U Sh 147,000 in the northern region. Farm
household size averaged 4.9 people who cultivated an average of two hect-
ares of land. About 17 percent of sample households used hired labor, with
27. If input use is correlated with unobservable characteristics of the household

(for example, managerial ability) or the farm (for example, soil quality), coefficient
estimates from a cross-section are likely to be biased. A priori determination of the
sign of the bias will be difficult, in view of the multitude of potential unobservable or
omitted variables. For example, fertilizer use is likely to be higher on low-quality
soils, leading to an underestimation of the impact of fertilizer. At the same time, if
better managers apply more fertilizer, possibly because local input traders who have
at least some knowledge about producers’ managerial ability are willing to approve
higher lines of credit for them, the coefficient of fertilizer would capture such unob-
served ability and therefore be biased upward. Panel data methods can be used to
overcome this problem under the condition that unobservable variables are time-
invariant (Mundlak 1978), an assumption that is likely to be satisfied in this case.
total household expenditure on hired labor averaging U Sh 15,800. While

virtually all producers in the sample used seeds, only 7 percent used fertil-
izer, pesticides, or other purchased inputs—a figure that was even lower (2
to 3 percent) in the western and northern regions. The mean value of nonland
farm and other household assets together amounted to about U Sh 26,000
per producer. About a quarter of the farm households were female-headed
and 11 percent were headed by widows. Eleven percent of households lived
in communities that received advice from extension workers. Heads of
sample households were on average 42 years old and had attended school
for about 4 years. Mean experience, computed as the age of the agricultural
enterprise, amounts to almost 20 years, implying that the average agricul-
tural producer started an independent farming enterprise at the age of 23.
Producers were also asked whether they had any difficulty in accessing
sufficient credit to run their enterprise, a question that was answered posi-
tively by 54 percent of the whole sample. All households who answered
this question affirmatively were classified as credit constrained, irrespec-
tive of whether or not they had actually received credit. Classifying house-
holds this way suggests that credit constraints have acquired increased
importance: while only 50 percent of producers had been credit constrained
in 1992, 60 percent had problems in accessing credit in 1993.
Results from the pooled ordinary least squares (OLS) regression and the
fixed and random effects panel estimations of the production function are
reported in table A5.6.28 The random-effects specification is the most appro-
priate.29,30 Therefore, the subsequent discussion focuses on the coefficients
from this estimator.
With an elasticity of 0.36 and 0.28, respectively, labor and land were the
obvious main inputs into agricultural production. For producers using
hired labor, the point estimate for the production elasticity of hired labor
at the mean was 0.25, which was significantly lower than the production
28. To accommodate the fact that more than 90 percent of the farmers in the sample
did not use purchased inputs and more than 80 percent did not hire labor, a specifica-
tion was adopted where a zero-one dummy variable for fertilizer and hired labor use
was included as well as the product of these dummy variables and the observed
input of fertilizer and hired labor.
29. While the coefficients obtained from the fixed-effects regression are consis-
tent, they may be inefficient due to the failure to take account of variation within
individual observations. The random effect estimator, which takes this variation into
account, would be preferable if there were no correlation between the fixed effects
and the error term. A Hausman test fails to reject the hypothesis of equality between
the coefficients from fixed and random-effects estimation, suggesting that the random-
effects specification is the most appropriate
30. The test statistic is distributed according to a χ2 distribution with 20 degrees
of freedom, and the value of 25.02 is below the critical values for the 5 percent (31.41)
and the 10 percent (28.41) level.
elasticity for family labor. Indeed, equality of the coefficients on own and
hired labor could be rejected at any conventional level of significance, sug-
gesting that, in line with the literature, supervision constraints limit sub-
stitutability between family and hired labor (see, for example, Frisvold
1994). Farm assets were shown to have a production elasticity of slightly
above 6 percent, which, given that they entered the production function in
value terms, was equivalent to their economic return. Farming experience
made a clearly positive contribution to productivity, the magnitude of
which increased rapidly up to about 5 to 8 years and flattened off subse-
quently, reaching its maximum at 24.5 years.
Household education is relevant for production outcomes. One addi-
tional year of education by the household head is estimated to increase
productivity by 5 percent, in addition to a positive return on farming ex-
perience. The lack of significance of the squared term suggested
nondecreasing returns to education in agricultural production over the
range observed in the sample. The point estimate of the coefficient is large,
suggesting that having universal primary education (seven years com-
pleted) for the population of farm operators would increase production
by 15 percent at the margin.31 This is consistent with the weaker and more
indirect evidence for payoffs to education found by Appleton and Balihuta
(1996) based on 1992 data. It contrasts, however, to the result by Bigsten
and Kayizzi-Mugerwa (1995) who found that in the preliberalization pe-
riod, returns to education were negligible. Assuming that their result can
be taken to be representative for the whole of Uganda,32 this would pro-
vide evidence that economic liberalization, in particular the elimination of
monopoly marketing in the agricultural sector had, by 1992/93, created
an environment where returns to education increased. While a community’s
access to roads does not affect agricultural productivity, it may affect the
quantities of input used through its impact on prices. Compared with the
importance of education, a surprising finding is that community-level ac-
cess to extension services (a variable that is available only at the commu-
nity level), although positive, remained insignificant, and that for 1992–
93, productivity seems actually to have decreased. Examining the degree
to which different trends—at the national or the regional level—have
emerged in the interim would be of great interest.
31. Re-estimation of the same model with only the level of education entered
does not change the magnitude of the coefficient.
32. While they only had a small sample (200 households), they surveyed one of
the most dynamic and technologically advanced agricultural districts. As the received
wisdom in the literature is that education is of value in dynamic environments char-
acterized by economic and technological change, it is very likely that failure to find
positive returns to education in this area implies the lack of such returns in other
districts as well.
Efficiency of Input Use and Determinants of Factor Demand

In addition to obtaining information on the determinants of productivity in
general, a main objective of estimating the production function was to examine
the degree to which the use of inputs has been economically optimal. Indeed,
coefficients from the random effects estimation point toward underutilization
of purchased inputs. Shifting farmers who do not use fertilizer to the mean
level of fertilizer consumption (about U Sh 3,900) observed in the sample would
increase output by almost 50 percent (U Sh 8,900), thereby providing a more
than 100 percent return on the required outlay. Similarly high returns are found
for a marginal increase in fertilizer use among producers who already apply
fertilizer. For example, applying U Sh 1,000 more of fertilizer would increase
output by U Sh 2,200, again, a more than 100 percent return. Even with provi-
sions for transport costs, the use of fertilizer would appear to be an attractive
investment, with rates of return significantly above the cost of credit.33 The ob-
served underuse of fertilizer may therefore point toward the existence of credit
market imperfections. While farmers use too little fertilizer, regression results
suggest that they apply more than the optimum amount of home-produced
seeds.34 Although there is clear evidence of inefficient input use, the production
function by itself did not indicate the degree to which imperfections in financial
or input markets may be responsible for this inefficient use.
This question provided a motivation for testing whether credit constraint
was a factor underlying the apparently suboptimal factor use. To do so, we
needed information on whether or not households were credit constrained,
something that cannot be directly observed. To make inferences on their credit
worthiness, we used producers’ responses to the question that asked whether
they had difficulty accessing credit to run their enterprise. Data show that only
about half of the households who failed to obtain credit were credit constrained
in this sense, while many farmers who obtained credit had difficulty in getting
the credit they wanted, and thus were actually credit constrained.35
33. Noting that even the most remote producers are less than 600 kilometers from
Kampala, transport costs would at most increase fertilizer prices by 20 percent (as-
suming a fertilizer price of US$300 and a transportation cost of US$0.1 per ton-
kilometer).
34. If anything, the coefficient on this variable is biased downward, because in
the case of perennials, producers obtain output even without having applied seed in
the current production cycle (and there is no measure of the production stock ap-
plied).
35. The cross-tabulation of constrained producers with actual loan recipients (for
the whole sample) is as follows:
Constrained Unconstrained Total

Received no loan 3,931 5,159 9,090
Received a loan 181 652 833
Total 4,112 5,811 9,923
Given the small number of households who actually used fertilizer

and the fact that only a few changed from nonusers during the short pe-
riod observed, there was too little variation over time to make inferences
on input demand from the panel estimation. We therefore pooled obser-
vations for 1992 and 1993 using maximum likelihood and OLS estimators
for fertilizer, hired labor, and seed use, all of them normalized per hectare
of land used. We also included the total value of assets rather than indi-
vidual components.
The second column in table A5.7 illustrates results for the use of pur-
chased inputs. As hypothesized, capital constraints significantly reduced
the propensity to use fertilizer. By contrast, the possession of assets and
land, which can be used as collateral in credit markets, increased the prob-
ability of fertilizer use. The positive sign of family size suggests that fertil-
izer and family labor complement each other. While neither experience
nor age had a significant effect, fertilizer use increased more than propor-
tionately with higher levels of household education. Also, the coefficient
of access to extension in the fertilizer demand equation was positive and
significant. This suggests that extension helps increase the intensity of fer-
tilizer use, thereby bringing the producer closer to the profit-maximizing
optimum. Distance to infrastructure was, as predicted, negative and sig-
nificant, which reflects, in part, a price effect. Regional dummies indicate
that in all regions the propensity to use fertilizer was much lower than in
the central region.
As all households in the sample used seeds, we estimated an OLS equation
of the quantity of seed used. The results, listed in the fourth column of table
A5.7, suggest that, contrary to what was found for fertilizer, capital constraints
increased farmers’ propensity to use seeds. The area of land owned had a sig-
nificant and negative impact, whereas more family labor and higher levels of
assets increased the level of seeds applied per hectare, possibly by allowing
more intensive cultivation. In contrast to fertilizer use, which decreased sig-
nificantly over time, farmers actually increased the rate of application of home-
produced seeds. Together with the lack of significance for virtually any other
variable (education, extension, distance to infrastructure) except regional dum-
mies, this implies that farmers without sufficient access to working capital tried
to substitute home-produced inputs for purchased inputs.
The use of hired labor was determined mainly by household characteris-
tics such as the amount of land owned, the gender of the household head,
the amount of assets owned, and the household head’s level of education.
All these variables have a strong, positive impact on labor use. The impact of
asset ownership (human as well as physical capital) suggests that well-
educated and well-endowed households established nonagricultural enter-
prises. Finding out why these households choose to adjust through the labor
rather than through the land rental market is important. As theory suggests
that the latter would provide superior incentives that would increase pro-
ductive efficiency, identifying the obstacles to proper functioning of the land
rental market could answer this question.
Nonagricultural Enterprise Start-Ups

During 1988–92 a considerable number of new enterprises sprang up, most
in the trade sector. Almost 50 percent of all households, and almost one-third
in rural areas, started a nonagricultural enterprise during this period. The
sectoral composition of new enterprises established differs between regions.
New farm enterprises dominate in the national aggregate and in the eastern
and northern regions. The opposite is true for the central and western re-
gions, where nonfarm enterprises exceeded farming enterprise start-ups. Of
the nonfarm businesses that were established during the period, most were
in trade (26 percent of households), followed by manufacturing, hotels, and
other services. Even within the trade sector, regional variation was pro-
nounced (34 percent of households started a trade enterprise in central re-
gion, but only 13 percent in the northern region).36
Empirical results (table A5.8) suggest that new trade enterprises did not
require large physical assets, but that enterprise start-ups were critically de-
pendent on a minimum level of education. As coefficients in table A5.8 are
marginal probabilities (at the mean of all other variables), they can be di-
rectly interpreted. For example, having a bank in the community increased
the probability of a household diversifying into trade by 5.6 percent; similar
to directly connecting to infrastructure a household living at the mean dis-
tance (33 kilometers) from a road in the north. A household whose head has
completed primary education was about 5 percent more likely to establish a
trading enterprise than one who did not attend school. There was no gender
bias against starting a trading activity. Recent immigration had a significant
and negative impact (by about 2.5 percentage points), supporting the conjec-
ture that trade requires longer presence in a community to build trust and
acquire information on the individuals that are likely to be involved in trans-
actions so as to assess their creditworthiness accurately. The fact that high
levels of initial assets were insignificant may indicate that with relatively
low barriers to entry (with the exception of education), the returns from trad-
ing activity were generally low and once individuals had acquired sufficient
levels of wealth, it paid for them to diversify into other areas. To the degree
that trade enterprises can serve as a point of entry into the off-farm economy
36. Prior to a discussion of the results, two technical issues need to be addressed.
First, to control for agroclimatic and other endowments that affect placement of
infrastructure, we include mean community income as one of the independent vari-
ables. Second, to avoid reverse causality whereby the establishment of enterprises
after 1987 but before 1992/3 has led to increased wealth—rather than the other
way—it is necessary to include the household’s initial capital stock. Unfortunately,
we have only asset levels at the beginning for 1992. As results from re-estimating
the same equations for enterprises started up only in 1992 (in which case our asset
measure clearly reflects initial conditions) were virtually identical, the five-year re-
gressions are reported here.
and a springboard to accumulate resources and experience to make the tran-

sition to other stages, the results suggested that education, financial services,
and road access are important determinants of off-farm diversification.
The number of enterprises established in other sectors was not only much
lower, but they were apparently less dependent on infrastructure access and
completely independent of educational levels. The establishment of crop farm
enterprises in a relatively land-abundant economy such as Uganda seems to
be even more strongly correlated with life cycle phenomena. While house-
holds starting nonagricultural enterprises do so at a more advanced age, the
opposite was true for household heads establishing a farming enterprise.
The strongly negative coefficient on age, together with almost universal in-
volvement of households in the rural farm economy, could indicate that farm
enterprises serve as an important first stepping stone into the nonfarm
economy. The positive coefficient on recent in-migration is likely to capture
households who migrated in search of land or were displaced through war.
Livestock and crop enterprises shared a location in relatively distant areas.
There are, however, a number of marked differences. The significance of as-
set ownership and age of the household head suggests that new livestock
enterprises generally occurred at a later stage in the life cycle, a finding that
is supported by the bias against female-headed households and the positive
significance of household size (reflecting the need for additional household
members to care for livestock). Both these results supported the conclusion
that, although financial services and education improved the efficiency of
the traditional farming sector, they were not an essential precondition for
establishing livestock or crop enterprises.
Even though they were based on earlier data, the results from the analy-
sis of agricultural productivity and of nonagricultural enterprise start-ups
were quite consistent with those from the earlier discussion of income growth
between 1992 and 1999. There was no indication of a conflict between growth
in agriculture and the nonagricultural rural sector. To the contrary, the main
factors contributing to agricultural productivity (education, financial infra-
structure, and asset ownership) were also key to improving economic per-
formance in the nonfarm sector. Contrary to earlier studies, which found
negligible returns to education in the prereform period, we find that educa-
tion has become an important determinant of both agricultural and nonagri-
cultural activity. This suggests that Uganda’s broad macroeconomic and
sectoral reforms succeeded in restoring incentives and in increasing returns
to private factors of production. It also implies that by focusing on broad
improvements in educational achievement, the government has identified—
and is aiming to improve—one of the key constraints to future economic
growth and poverty reduction in rural areas.
The fact that community income levels emerged as the quantitatively
most important determinant of nonfarm enterprise start-ups provides fur-
ther indication for complementarity between farm and nonfarm sectors.
The rural sector’s ability to respond to the changed economic environment
and incentive framework has been constrained by imperfections in factor

markets, especially access to productive infrastructure. Limited progress
in improving productivity indicates that in addition to improving levels of
human capital and the functioning of factor markets, greater efforts are
required to improve the availability and awareness of improved technol-
ogy through research and extension.
Uganda has thus far seen an organic evolution of the off-farm sector based
on agricultural income growth. This evolution is in marked contrast to coun-
tries where unequal initial asset distribution (for example, education and land)
has led to an unequal distribution of off-farm income, thereby causing further
polarization of the income distribution (Feldman and Leones 1998; Lanjouw
1998). To maintain this relationship that, thus far, seems to have prevented
increases in overall income inequality, it will be essential to ensure a regional
balance in policies aimed at promoting education, infrastructure, and agricul-
tural productivity to ensure broad access to economic opportunities. Failure to
do so will not only cut the tight link between growth and poverty reduction
that has been characteristic for Uganda thus far, but also threaten the
sustainability of economic growth in a more fundamental way.
Conclusions
Noting the critical importance of rural income growth for overall poverty
reduction in Uganda, this chapter combined descriptive evidence and econo-
metric analysis to highlight the accomplishments of the past and to outline
the challenges that Uganda faces in the future. The community- and
household-level data suggest accomplishments in a number of areas, namely:
• During 1992–99 levels of per capita income grew significantly with-

out deterioration in income distribution. Households with low income
levels in 1992, but with human and physical capital assets, were able
to benefit the most from overall growth.
• Cotton output has recovered and shows strong signs of growth, espe-
cially in the northern region. Similarly, nontraditional crops (toma-
toes, cabbage, and fruit) are grown more widely and could provide a
basis for diversification and sustained income growth in rural areas.
Half of the communities (villages) in the north reported that both the
number of cotton producers and cotton yields increased between 1992
and 1999. In the eastern region 25 percent of communities reported
increases in the number of growers and yields.
• The extent of livestock ownership has increased significantly (the num-
ber of owners more than doubled) as has investment in rural areas.
The use of HYV has also increased considerably, albeit both from very
low levels.
• The functioning of rural factor markets has improved and the number
of land rental transactions and the share of producers with access to
credit have increased strongly. More interesting, most of the credit

obtained is used for productive investment, suggesting that produc-
ers are aware of and make use of new economic opportunities.
• The share of producers who have access to extension services and pri-
mary school enrollments have increased greatly in rural areas. Given
the importance of education for agricultural productivity and the start-
up of nonfarm enterprises, this could provide the basis for more
knowledge-based development in the future.
• Although agriculture remains the mainstay of the rural economy, ru-
ral households have used opportunities to diversify into off-farm in-
come generation and establishment of nonagricultural enterprises.
Analysis of the determinants of nonfarm enterprise start-ups illus-
trates the crucial role of education and access to financial markets.
At the same time, despite the indisputable successes, there is little room
for complacency:
• With the exception of cotton, the north has seen little agricultural di-
versification and growth. In the rest of the country, output remains
variable, mainly due to crop diseases. Differential performance by
communities even within the same region suggests that better access
to existing technology and information could offer large scope for in-
creasing productivity.
• Despite continued efforts, extension service coverage remains limited,
and 64 percent of communities reported not having access to an ex-
tension worker. Similarly, about a quarter of producers reported not
having used credit due to the nonavailability of a bank.
• Land conflicts exist in about half of the communities. Unless cost-
effective ways are found to implement recent land legislation, these
conflicts and other tensions could easily threaten social stability and
rapid development.
The analysis in this chapter demonstrates that the government’s strong fo-
cus on rural areas has resulted in a propoor growth pattern and has provided
the preconditions for a revival of the rural sector. However, it also demon-
strates that technology, financial services, and infrastructure will be needed to
improve levels of human capital and structurally transform the rural sector. In
all these respects Uganda has the potential to teach valuable lessons to other
African countries that have recently embarked on programs of liberalization.
Annex 5.1. Tables of Estimation Results

Table A5.1. Changes in Extent of Production, Number of Producers, and Yields of Main Commodities, 1992–99
Current production Changes since 1992 (percent)

Crop crop is grown by Number of producers Yields Reason for
and region 50%–100% 0%–50% 0% Increased Decreased Increased Decreased yield change
Matooke
Central 33.3 23.0 43.7 20.7 14.9 14.9 25.3 Disease
Eastern 10.6 31.3 58.1 8.9 21.2 7.8 18.4 Disease
Northern 2.0 8.2 89.8 4.1 3.1 2.0 5.1 n.a.
Western 55.4 26.4 18.2 31.1 20.9 13.5 58.8 Weather
National 25.8 24.0 50.2 16.4 16.6 9.6 28.7 Weather
Maize
155
Central 54.0 5.7 40.2 34.5 2.3 29.9 13.8 Fallow
Eastern 60.3 10.1 29.6 40.2 2.8 35.8 9.5 Other
Northern 48.0 26.5 25.5 14.3 36.7 12.2 60.2 Weather
Western 73.6 14.2 12.2 47.3 8.8 28.4 43.2 Weather
Beans
Central 51.7 11.5 36.8 31.0 8.0 26.4 20.7 Fallow
Eastern 50.8 30.2 19.0 41.3 7.3 25.1 13.4 Other
Western 81.8 4.7 13.5 51.4 6.8 29.1 39.2 Weather
Table A5.1 continued

Sorghum
Central 2.3 16.1 81.6 5.7 2.3 3.4 3.4 n.a.
Eastern 31.3 24.6 44.1 7.8 16.2 13.4 16.2 n.a.
Western 33.1 35.1 31.8 16.2 8.8 14.2 20.9 Weather
Millet
156
Central 8.0 11.5 80.5 8.0 3.4 5.7 3.4 n.a.
Eastern 33.0 29.1 38.0 9.5 20.1 8.9 31.3 Weather
Western 59.5 18.2 22.3 42.6 8.1 31.1 20.3 Weather
Groundnut
Central 20.7 26.4 52.9 20.7 12.6 16.1 23.0 Animals
Eastern 31.8 39.1 29.1 17.9 31.3 16.2 34.1 Disease
Western 37.2 36.5 26.4 31.1 10.8 14.2 33.8 Weather

Cassava
Central 32.2 26.4 41.4 12.6 35.6 6.9 44.8 Disease
Eastern 36.3 28.5 35.2 33.5 26.3 29.1 26.8 Disease
Western 61.5 14.2 24.3 45.3 6.1 25.7 31.8 Disease
National 47.3 23.4 29.3 29.9 22.3 21.7 38.7 Disease
Coffee
157
Central 19.5 25.3 55.2 6.9 29.9 2.3 39.1 Disease
Eastern 21.2 19.6 59.2 16.2 12.3 12.8 16.8 Disease
Northern 0.0 1.0 99.0 1.0 0.0 0.0 0.0 n.a.
Western 27.0 27.0 45.9 18.2 19.6 6.1 32.4 Disease
Cotton
Central 1.1 6.9 92.0 4.6 2.3 3.4 4.6 n.a.
Eastern 9.5 28.5 62.0 24.6 8.9 21.8 8.4 Technology
Northern 30.6 35.7 33.7 50.0 11.2 48.0 16.3 Other
Western 2.0 3.4 94.6 3.4 3.4 0.7 1.4 n.a.
National 10.0 18.9 71.1 19.9 6.6 17.6 7.2 Other

Tomato
Central 5.7 16.1 78.2 14.9 2.3 17.2 2.3 Input and
labor use
Eastern 3.9 43.6 52.5 16.2 5.6 10.1 7.3 Disease
Western 10.1 47.3 42.6 17.6 5.4 1.4 20.9 Disease
158
Cabbage
Central 2.3 8.0 89.7 9.2 1.1 10.3 0.0 n.a.
Eastern 3.9 35.2 60.9 2.8 5.6 2.8 6.7 Disease
Northern 1.0 9.2 89.8 2.0 0.0 0.0 3.1 n.a.
Western 4.7 48.0 47.3 11.5 7.4 0.0 22.3 Disease
Mango
Central 3.4 4.6 92.0 0.0 4.6 2.3 1.1 n.a.
Eastern 1.1 8.9 89.9 0.0 0.0 0.0 0.0 n.a.
Western 19.6 10.1 70.3 14.2 0.7 1.4 3.4 n.a.

Orange
Central 2.3 3.4 94.3 0.0 0.0 0.0 2.3 n.a.
Eastern 1.1 27.4 71.5 2.2 6.7 0.6 3.4 n.a.
Northern 20.4 36.7 42.9 2.0 1.0 2.0 53.1 Disease
Western 2.0 6.8 91.2 3.4 3.4 0.0 6.8 n.a.
159
Passion fruit
Central 1.1 2.3 96.6 2.3 0.0 0.0 1.1 n.a.
Eastern 0.0 23.5 76.5 1.1 4.5 0.6 1.1 Reduced
fallow
Northern 1.0 15.3 83.7 9.2 0.0 11.2 1.0 Labor use
Western 8.8 16.9 74.3 10.8 1.4 2.0 9.5 Weather
Source: Authors’ calculations based on key informant interviews in 512 communities; integrated household survey 1992/93 and the national household
survey 1999/2000.
Table A5.2. Changes in Technology and Input Use, 1992–99
Panel 1. Ownership of livestock and mechanical equipment (percent of household level)
Value of
livestock owned
Owning cows in Owning bulls in Owning oxen in Owning plow in (million U Sh)
Region 1999 1992 1999 1992 1999 1992 1999 1992 1999 1992
Central 15.7 7.8 4.1 2.2 0.2 0.1 0.9 0.7 1,182.03 956.08
East 22.1 11.9 8.7 4.4 4.4 2.1 7.2 4.1 612.46 354.20
North 18.3 8.9 8.9 4.7 2.7 1.6 6.7 4.3 844.10 586.88
West 22.4 13.7 7.9 4.4 0.2 0.1 2.0 1.6 1,444.22 1,130.03
160
Total 19.8 10.7 7.2 3.8 1.8 0.9 4.0 2.5 1,004.42 738.36
Panel 2. Use of ox plows, community level (percent)
Used by Increased Did not Decreased

Region 100% 75% 50% 25% 0 >25% 0–25% change 0–25% > 25%
Central 0.0 0.0 0.0 3.4 5.0 0.0 3.5 87.9 1.7 6.9
East 2.6 14.5 6.6 26.3 50.0 11.2 9.9 51.3 5.3 22.4
North 0.0 0.0 0.0 52.3 47.7 1.2 34.5 41.7 2.4 20.2
West 0.0 0.0 0.7 3.7 95.6 3.7 1.5 81.3 0.8 12.7
Total 0.9 5.1 2.6 21.3 70.1 5.4 11.2 63.8 2.8 16.8
Panel 3. Use of tractor, community level (percent)
Used by Increased Did not Decreased

Region 100% 75% 50% 25% 0 >25% 0–25% change 0–25% > 25%
Central 0.0 0.0 1.6 9.8 88.5 1.7 1.7 73.3 10.0 13.3
East 0.0 2.0 1.3 22.4 74.3 0.0 4.6 64.5 9.2 21.7
North 0.0 0.0 0.0 6.2 93.8 0.0 0.0 81.3 1.3 17.5
West 3.0 2.2 0.7 5.9 88.2 3.0 3.0 79.9 3.0 11.2
Total 0.9 1.4 0.9 12.4 84.4 1.2 2.8 73.7 5.9 16.4
161
Panel 4. Use of hybrid seeds, fertilizer, and pesticides (percent)
Household-level data Community-level data

Area planted to HYV in Use of Fertilizer used by Pesticides used by
Region 1999 1992 Manure Fertilizer Pesticides 0%–50% 0.0% >50% 0%–50% 0.0%
Central 5.0 1.1 13.3 3.4 11.4 21.3 78.7 4.9 23.0 62.3
East 9.1 3.7 1.9 3.0 9.6 15.2 84.8 13.3 35.4 45.6
North 3.2 0.9 0.6 4.6 3.3 8.5 91.5 1.1 2.1 91.5
West 1.2 0.3 6.4 1.6 3.1 10.3 89.7 8.1 22.1 67.6
Total 4.8 1.6 5.8 3.0 7.1 13.1 86.9 8.0 22.7 64.1
Panel 5. Use of hybrid seeds and changes in such use, community level (percent)
Hybrid seed used by Increased Did not Decreased

Region 100% 75% 50% 25% 0% >25% 0%–25% change 0–25% > 25%
162
Central 0.0 1.6 0.0 59.0 39.3 18.0 26.2 42.6 3.3 9.8
East 0.0 9.2 6.6 55.3 29.0 10.5 19.1 44.1 11.2 15.1
North 1.2 2.4 2.4 23.5 70.6 2.4 10.7 66.7 2.4 17.9
West 1.5 1.5 2.3 51.1 43.6 6.8 33.1 44.4 6.8 9.0
Total 0.7 4.4 3.5 48.3 43.2 8.8 22.8 48.4 7.0 13.0
HYV High-yielding varieties.
Source: Authors’ calculations from the 1999/2000 national household survey.
Table A5.3. Changes in Functioning of Credit and Land Markets, 1992–99
Panel 1. Credit use, household level (percent)
Household had a loan Reason for not applying

Region In past In 1999 No need Don’t know No bank No security High rates
Central 15.4 11.8 38.0 18.4 9.6 27.1 6.8
East 20.2 20.0 37.2 17.3 12.3 28.5 4.7
North 6.1 6.3 49.3 21.4 14.1 11.3 4.0
West 24.0 23.7 47.1 18.6 10.8 16.2 7.4
Total 17.6 16.5 42.1 18.7 11.5 21.9 5.9
163
Panel 2. Credit availability (n = 432) (percent)
Source of formal credit

Total Registered Local Institution closed down
b
Region availability a Bank Entandikwa cooperative cooperative Total Bank Entandikwa Cooperative
Central 49.2 23.0 32.8 4.9 10.0 32.8 6.4 14.8 24.4
East 38.2 13.2 25.7 5.3 9.2 36.9 1.5 19.7 23.9
North 20.0 0.0 10.6 7.1 4.7 10.6 1.2 3.5 7.9
West 64.7 21.1 34.6 13.5 19.6 28.0 4.8 11.3 29.9
Total 44.3 14.4 26.5 8.1 11.6 28.3 3.0 13.2 21.8
Panel 3. Credit use, household level (percent)
Source of loan Purpose of loan

Cooperative/ Household Education/
Region Bank government NGO Business Relatives goods health Inputs Enterprise c Land d
Central 6.1 14.7 27.8 3.5 48.0 5.1 16.0 12.0 54.3 12.6
East 1.7 13.7 16.7 2.3 65.7 7.0 29.6 6.6 49.4 7.4
North 8.2 35.3 29.4 3.5 23.5 1.3 6.3 40.5 50.6 1.3
West 7.0 26.7 5.5 4.2 56.7 10.6 28.2 15.9 34.8 10.6
Total 5.2 20.6 16.2 3.4 54.7 7.4 23.9 14.5 45.1 9.1
164
Panel 4. Land use and land rental markets, household level (percent)
Cultivated land
(in acres) Renting in land Renting out land
Region 1999 1992 1999 1992 1999 1992
Central 2.53 1.91 25.3 9.7 12.3 5.4
East 2.26 1.54 30.4 7.5 13.4 5.5
North 1.77 1.29 10.6 3.1 8.3 2.7
West 2.28 1.58 23.2 6.0 5.7 1.3
Total 2.25 1.60 24.0 7.1 10.1 3.8
Panel 5. Land sale and rental markets, community level (percent)
Land price
U Sh Land for rental
thousands/ Number of annual land sales Land sales market activity available e
Region acre 0 1–2 3–5 >5 Increased Constant Decreased 1999 1992
Central 466.38 35.7 16.1 30.4 17.9 37.7 32.1 30.2 53.2 53.2
East 459.89 42.0 18.2 28.0 11.9 28.1 48.2 23.7 66.3 66.3
North 56.86 86.9 4.8 7.1 1.2 6.6 93.4 0.0 24.7 9.3
West 526.84 37.0 20.7 28.9 13.3 42.3 46.9 10.8 63.0 54.1
Total 398.23 48.6 16.0 24.4 11.0 29.9 54.3 15.8 55.2 49.5
Panel 6. Prevalence of land conflicts, community level (percent)
165
Number of land conflicts Increased Did not Decreased
Region 0 1-5 >5 >25% 0%–25% change 0–25% > 25%
Central 48.3 45.0 6.7 4.9 11.5 52.5 13.1 18.0
East 41.9 49.3 8.8 4.0 12.7 64.0 12.7 6.7
North 84.3 13.3 2.4 0.0 6.0 94.0 0.0 0.0
West 30.8 56.7 12.5 21.3 14.7 56.6 2.2 5.1
Total 48.2 43.6 8.3 8.8 11.9 65.8 7.0 6.5
NGO Nongovernmental organization.
a. As communities may have more than one source of formal credit, the percentages in this column will not necessarily be equal to sums of subsequent columns.
b. Entandikwa is a government credit scheme.
c. Establishment of enterprise.
d. Purchase of land or livestock.
e. Land rental is practiced in the community.
Source: Authors’ calculations based on 1999/2000 national household survey.
Table A5.4. Changes in Access to Infrastructure, Services, and Governance, 1992–99
Panel 1. Access to infrastructure and other facilities (community level)
Time taken in minutes to

Feeder Tarred
Region road road Bus Taxi Truck Post Telephone Hospital Factory Changes a
Central 9 42 49 35 47 45 46 46 39 10.3%
East 18 63 52 43 47 55 61 48 58 12.2%
North 66 123 87 78 115 131 139 119 107 1.0%
West 20 80 55 42 52 62 66 41 66 3.4%
Total 26 75 59 48 61 70 75 57 63 7.2%
166
Panel 2. Access to extension advice and main source of information on technology (percent)
Household level Community level

1–2 contacts a year > 2 contacts a year Main source of information on technology
Extension Private
Region 1998 1992 1998 1992 Radio agent sector Farmers Other
Central 18.5 13.3 10.5 10.8 64.8 16.7 3.7 13.0 1.9
East 15.9 8.9 2.9 3.2 38.4 30.5 7.3 6.0 17.9
North 15.5 8.1 1.1 1.4 96.3 0.0 3.7 0.0 0.0
West 16.9 11.9 5.9 5.6 23.3 20.9 41.1 6.2 8.5
Total 16.8 10.7 5.3 5.5 48.6 19.7 16.6 5.8 9.4
Panel 3. Farmers’ access to extension worker, community level (percent)
Access to extension worker by region Increased Did not Decreased

Region 100% 75% 50% 25% 0% >25% 0%–25% change 0–25% > 25%
Central 0.0 8.2 3.3 21.3 67.2 6.7 20.0 65.0 6.7 1.7
East 2.0 10.6 4.6 28.5 54.3 4.7 9.4 55.0 7.4 23.5
North 0.0 1.2 1.2 7.3 90.2 1.3 1.3 77.5 1.3 18.8
West 9.6 11.9 1.5 18.5 58.5 9.7 21.6 56.7 3.0 9.0
Total 3.7 8.9 2.8 20.3 64.3 5.9 13.2 61.2 4.7 14.9
167
Panel 4. Cattle ownership and access to veterinary services, community level (percent)
Veterinary services are

Region Holding cattle Available Public Private Do artifical insemination b
Central 90.3 67.7 53.2 19.4 22.6
East 87.7 77.2 66.0 14.2 18.5
North 80.6 48.4 35.5 9.7 1.1
West 73.8 63.8 55.3 13.5 5.7
Total 82.3 65.9 54.8 13.8 11.6
Panel 5. Physical violence, household level
Percentage of households suffering from

Theft in Civil strife in Physical attack in Social capital c (percent)
Region 1999 1992 1999 1992 1999 1992 1992 1998
Central 17.5 10.6 8.0 3.6 7.8 6.6 33.0 33.0
168
East 22.1 13.5 15.2 10.1 10.5 8.6 40.1 40.1
North 21.1 16.8 10.3 10.4 9.3 7.4 39.7 35.3
West 19.1 12.9 18.4 7.8 8.3 6.9 31.1 26.8
Total 19.9 13.1 13.3 7.7 8.9 7.4 35.7 34.1
a. Whether or not changes in infrastructure access occurred between 1992 and 1999
b. Veterinaries that practice artificial insemination (AI)
c. As explained in the text, social capital is defined as the share of households that, after experiencing a shock, received assistance from their communities.
Source: Authors’ calculations based on the 1999/2000 national household survey.
Table A5.5. Determinants of Household-Level Income Growth, 1992–99
Robust regression estimates

Item Coefficient t Coefficient t Mean
Initial household
characteristics
Head’s education
in 1992 0.5522 4.11 0.6304 4.75 4.23
Head’s age in 1992 –0.1395 –4.36 –0.1136 –3.55 36.76
Household members
(adjusted equality)
in 1992 0.7222 2.36 0.8511 2.81 3.55
Assets in 1992
(U Sh 1,000) 0.0004 5.48 0.0001 4.66 3489.96
Income in 1992
(U Sh 1,000) –0.0122 –28.39 –0.0113 –26.33 833.03
Female headed in 1992 0.6900 0.54 1.4081 1.10 0.24
Widowed in 1992 –2.1066 –1.19 –1.1334 –0.64 0.11
Electricity available
in 1992 2.6040 1.40 3.4671a 1.81 0.10
Initial community
characteristics
District to public
transport in 1992 –0.0253 –0.92 –0.0028 –0.10 11.90
Bank within 10 kms
in 1992 2.2289 2.15 1.4444 1.32 0.38
Rural 2.4523 1.21 1.5507 0.75 0.91
Regional dummies
Eastern region –4.6649 –3.65 0.25
Northern region –4.2278 –2.62 0.12
Western region 0.5006 0.42 0.34
Intercept 15.3028 5.20 18.6727 3.85
2
R adjustment/F 76.620 25.790
Number of
observations 953 953
Note: Numbers in bold indicate that the estimated coefficient is statistically significant at the
conventional level.
a. Coefficient is significant at 10 percent.
Source: Authors’ calculations based on 1999/2000 national household survey and the 1992
integrated household survey.
Table A5.6. Results from the Agricultural Production Function Estimation
OLS pooled Fixed effects Random effects

Item Coefficient t Coefficient t Coefficient z
Family labor 0.3324 18.10 0.2228 2.04 0.3599 6.13
Hired labor dummy –1.3746 –7.50 –1.6366 –2.35 –1.7190 –3.17
Hired labor (log) 0.1663 8.73 0.1814 2.51 0.2003 3.57
Seed (log) 0.0970 18.43 0.1028 4.92 0.0949 6.00
Fertilizer dummy –1.4709 –7.67 –1.7179 –2.24 –1.9080 –3.30
Fertilizer (log) 0.1996 8.60 0.2418 2.65 0.2773 4.04
Other inputs (log) 0.0242 8.29 0.0296 2.59 0.0219 2.51
Land (log) 0.5140 18.76 0.1985 1.89 0.2842 3.74
Farm assets (log) 0.0564 8.99 0.0368 1.56 0.0633 3.61
Nonfarm assets (log) 0.0016 0.77 0.0043 0.52 0.0027 0.43
170
Female head dummy –0.1291 –5.34 –0.1663 –0.77 –0.1437 –1.77
Experience (log) 0.0152 7.76 0.1960 0.71 0.4904 2.53
Experience (log) squared –0.0002 –6.84 –0.0333 –0.63 –0.0759 –2.01
Age of head 0.0002 0.06 0.0280 1.11 0.0154 1.39
Age of head squared 0.0000 –0.43 –0.0003 –1.14 –0.0001 –1.29
Head’s years of education 0.0382 5.40 –0.0297 –0.61 0.0497 2.13
Head’s education years squared –0.0028 –4.76 0.0042 1.08 –0.0016 –0.79
Access to extension 0.0119 0.37 0.1844 1.67 0.1295 1.53
Time dummy –0.1358 –5.62 –0.0346 –0.48 –0.1315 –2.17
Road distance –0.0004 –2.36 –0.0004 –0.60 0.0003 0.71
Rural dummy 0.1045 3.76 0.0597 0.70
Western dummy –0.0182 –0.65 –0.1486 –1.73
Eastern dummy –0.3660 –12.61 –0.3312 –3.61
OLS pooled Fixed effects Random effects

Item Coefficient t Coefficient t Coefficient z
Northern dummy –0.5927 –18.80 –0.5925 –5.53
171
Constant 7.3323 70.02 7.1287 9.96 6.4980 18.47
Number of observations 8,651 1,046 1,046
R2 adjustment 0.3101 0.2505 0.3224
Hausman test 23.38
Note: Numbers in bold indicate that the estimated coefficient is statistically significant at the conventional level.
Source: Authors’ calculations based on the 1992 integrated household survey and the 1993/94 first monitoring survey (MS-1).
Table A5.7. Demand Functions for Fertilizer, Seeds, and Hired Labor
Fertilizer (probit) Seed (OLS) Hired labor (Tobit)

Item dF/dx z Coefficient t Coefficient t
Capital constraints –2.037 –4.60 14.466 3.03 0.501 1.24
Land (log) 2.569 4.76 –58.894 –9.17 6.880 13.71
Household members (log) 0.839 2.05 26.888 6.06 0.390 1.03
Assets (log) 0.620 4.52 4.810 3.26 0.647 5.24
Female head dummy –0.338 –0.62 11.244 1.92 2.021 4.06
Experience –0.004 –0.10 0.370 0.80 –0.058 –1.46
Experience squared 0.000 –0.24 –0.008 –1.38 0.001 0.95
Age of head –0.105 –1.20 –0.008 –0.01 –0.018 –0.23
Age of head squared 0.001 0.70 –0.006 –0.67 0.000 –0.21
172
Head’s education years –0.083 –0.55 2.855 1.67 0.602 4.30
Head’s education years squared 0.036 3.30 –0.103 –0.74 0.011 1.08
Access to extension 2.288 3.31 2.478 0.32 1.083 1.64
Road distance –0.028 –4.15 –0.058 –1.29 –0.005 –1.36
Time dummy –3.203 –6.29 92.811 16.01 –2.611 –5.31
Rural dummy –1.154 –1.82 13.629 2.04 –3.999 –7.69
Western dummy –5.953 –10.94 56.745 8.47 –4.747 –8.38
Eastern dummy –1.812 –3.62 67.607 9.99 –2.485 –4.56
Northern dummy –4.128 –7.47 58.777 8.14 –5.001 –8.32
Constant 8.446 35.01 –19.096 –9.09
Log likelihood/R2 adjustment –1,844.491 0.083 –7,686.263
Note: Numbers in bold indicate that the estimated coefficient is statistically significant at the conventional level.
Source: Authors’ calculations based on the 1992 integrated household survey and the 1993/94 first monitoring survey.
Table A5.8. Probit Estimates for the Probability of Enterprise Startups in 1987/88–1992/93
Nonagricultural enterprises Agricultural enterprises

Trade enterprise Hotel enterprise Farm enterprise Livestock enterprise
Item dF/dx z dF/dx z dF/dx z dF/dx z
Total nonland assets (log) –0.7214 –3.96 0.5859 5.94 –0.4939 –1.80 1.3077 9.00
Bank in community 5.5962 4.77 2.2709 4.23 –4.0147 –2.61 –3.6549 –5.86
Moneylender in community 0.0894 0.06 –0.5469 –0.91 2.7562 1.34 –1.3260 –1.37
Household members (log) –0.1771 –1.15 –0.1558 –2.12 –0.0458 –0.22 0.3311 4.36
In-migration during last 5 years –2.4989 –2.45 0.9387 1.92 2.8544 2.01 –0.3367 –0.61
Female head dummy 1.2599 1.20 0.5406 1.12 –0.5825 –0.41 –1.8864 –3.36
Age of head 0.1738 1.09 0.2109 2.77 –1.4591 –6.66 0.2096 2.35
Age of head squared –0.0001 –0.07 –0.0021 –2.62 0.0116 5.13 –0.0019 –2.02
173
Head’s education years 1.1136 3.58 –0.1984 –1.40 –0.0956 –0.22 –0.0060 –0.04
Head’s education years squared –0.0549 –2.50 0.0021 0.21 –0.0324 –0.98 0.0165 1.35
Road distance –1.5513 –4.68 0.3818 2.58 2.5508 5.63 1.2528 6.67
Mean community income
(U Sh/month) 13.4616 11.99 1.9381 3.88 –18.2777 –11.84 –1.0467 –1.74
Rural dummy –11.1854 –8.27 –0.4913 –0.83 20.8621 11.96 2.0507 2.85
Northern dummy –8.9709 –6.53 0.8875 1.11 0.8978 0.46 1.4919 1.97
Western dummy 2.6348 2.07 9.0618 10.93 –2.5607 –1.42 –4.9195 –7.36
Eastern dummy –5.1673 –4.47 3.9793 5.56 3.4024 2.04 –0.5099 –0.82
Log-likelihood –3,711.17 –1,772.56 –4,626.67 –2,200.63
Pseudo R2 0.235 0.128 0.234 0.125
Note: Numbers in bold indicate that the estimated coefficient is statistically significant at the conventional level. Year dummies included but not reported.
Source: Authors’ calculations based on the 1992 integrated household survey and the 1993/94 first monitoring survey.
References
Appleton, Simon. 1996. “Women-Headed Households and Household Wel-
fare: An Empirical Deconstruction for Uganda.” World Development
24(12): 1811–27.
Appleton, Simon, and Arsene Balihuta. 1996. “Education and Agricultural
Productivity: Evidence from Uganda.” Journal of International Develop-
ment 8(3): 415–44.
Baland, Jean-Marie, Gaspart Frédéric, Frank Place, and Jean-Phillippe
Platteau. 1999. “Poverty, Tenure Security and Access to Land in Cen-
tral Uganda: The Role of Market and Non-Market Processes.” Research
Series no. 216, pp. 1-39. Notre-Dame de la Paix, Faculty of Economics
and Social Sciences, Namur, Belgium.
Belshaw, Deryke, Peter Lawrence, and Michael Hubbard. 1999. “Agricultural
Tradables and Economic Recovery in Uganda: The Limitations of Struc-
tural Adjustment in Practice.” World Development 27(4): 673–90.
Besley, Timothy. 1995. “Property Rights and Investment Incentives: Theory
and Evidence from Ghana.” Journal of Political Economy 103(5): 903–37.
Bigsten, Arne, and Steve Kayizzi-Mugerwa. 1995. “Rural Sector Responses
to Economic Crisis in Uganda.” Journal of International Development 7(2):
181–209.
Brasselle, Anne-Sophie, Gaspart Frédéric, and Jean-Phillippe Platteau. 1997.
“Land Tenure Security and Investment Incentives: Some Further Puz-
zling Evidence from Burkina Faso.” Research Series no. 201, pp. 1-53.
Notre-Dame de la Paix, Faculty of Economics and Social Sciences,
Namur, Belgium.
Brett, E. A. 1973. Colonialism and Underdevelopment in East Africa: The Politics
of Economic Change, 1919–1939. London: Heinemann.
Deaton, Angus. 1997. The Analysis of Household Surveys: A Microeconometric
Approach to Development Policy. Baltimore and London: The Johns
Hopkins University Press.
Deininger, Klaus. 2000. “Is Land Tenure in Africa Really Unimportant for
Investment?” Development Research Group, World Bank, Washing-
ton, D.C. Processed.
Deininger, Klaus, and Hans Binswanger. 1999. “The Evolution of the World
Bank’s Land Policy.” World Bank Research Observer 14(2):47–76.
Deininger, Klaus, and Gershon Feder. 2000.“Land Institutions and Land

Markets.” In B. Gardner and G. Raussser, eds., Handbook of Agricul-
tural Economics. Amsterdam: Elsevier-North Holland.
Deininger, Klaus, and John Okidi. 2000. “Market Participation, Agricultural
Productivity, and Nonagricultural Enterprise Start-Ups.” Development
Research Group, World Bank, Washington, D.C. Processed.
Feldman, S., and J. P. Leones. 1998. “Nonfarm Activity and Rural Household
Income: Evidence from Philippine Microdata.” Economic Development
and Cultural Change 46(4): 789–806.
Frisvold, George B. 1994. “Does Supervision Matter? Some Hypotheses Tests
Using Indian Farm Level Data.” Journal of Development Economics 43(2):
460–71.
Hayami, Yujiro, ed. 1998. Towards the Rural-Based Development of Commerce
and Industry. Selected Experiences from East Asia. WBI Learning Resource
Series. Washington D.C.: World Bank.
Hazell, Peter B. R., and Behjat Hojjati. 1995. “Farm/Nonfarm Growth Link-
ages in Zambia.” Journal of African Economies 4: 406–35.
Kwagala, Betty. 1999. “Integrating Women’s Reproductive Roles with Pro-
ductive Activities in Commerce: The Case of Businesswomen in
Kampala, Uganda.” Urban Studies 36(9): 1535–50.
Lanjouw, Peter. 1998. “Rural Nonagricultural Employment and Poverty in
Ecuador.” Economic Development and Cultural Change 48(1): 91–122.
Lanjouw Peter, and Jean O. Lanjouw. 1997. “Rural Nonfarm Employment. A
Survey.” Policy Research Working Paper no. 1463. World Bank, De-
velopment Research Group, Washington, D.C.
Mundlak, Yair. 1978. “On the Pooling of Time Series and Cross-Section Data
Sources.” Econometrica 46(1): 69-85.
Platteau, Jean-Phillippe. 1996. “The Evolutionary Theory of Land Rights as
Applied to Sub-Saharan Africa: A Critical Assessment.” Development
and Change 27: 29–86.
Reardon, Thomas, and Edward J. Taylor. 1996. “Agroclimatic Shock, Income
Inequality, and Poverty: Evidence from Burkina Faso.” World Develop-
ment 24(5): 901–14.
World Bank. 1996. Uganda: The Challenge of Growth and Poverty Reduction.
Washington, D.C.
6
Crop Markets and Household

Participation
During years of violence, political instability, and economic collapse, Ugan-

dans retreated into self-sufficient agriculture. Even today, farming for home
consumption remains a primary activity for most rural households. Crop mar-
kets are therefore a key link between subsistence-oriented households and the
recovering formal economy. Evidence from other countries indicates that some-
times these markets do not work well, and high transaction costs—often re-
lated to poor information and uncertainty about property rights and contract
performance—can limit the benefits of participating in formal markets.
This chapter presents evidence from survey data that suggest that crop
markets in Uganda effectively convey prices from district to local markets, but
that transaction costs differ significantly among crops. The community and
household survey data also show that the variance in crop market characteris-
tics and quality measures largely explains differences in prices. Current mar-
ket conditions encourage households willing to produce export crops rather
than food crops, since both transaction costs and uncertainty are lower for
export crops (see Martin 1962 for a historical perspective). Given that the sur-
vey includes community-level information about several crop markets, a dis-
tinction can be made between factors that explain differences in average price
levels between communities and those in crop markets.
These results also suggest that transaction costs could be reduced by
the development of private market institutions that foster product stan-
dardization and help gather and disseminate market information. The scope
for direct public interventions, however, is limited. In contrast to export
crops, transaction costs are likely to be high in food crops because of a lack
of specialization in Ugandan agriculture and labor markets more gener-
ally, which gives rise to uncertain demand and thin markets. Some evi-
dence exists, however, of diversification within sectors. A continued change
177
178 Donald Larson and Klaus Deininger
in the composition of the economy along with growth in incomes can cre-
ate greater opportunities for households to participate in formal domestic
crop markets and export markets.
Market Participation in the Early 1990s

Uganda remained overwhelmingly rural in the early 1990s with only 12 per-
cent of the population living in urban areas. Seventy-seven percent of Ugan-
dans were farmers, and 94 percent of all rural households engaged in farming
(table 6.1). Households engaged in other income-generating activities and many
received remittances, so that agriculture generated just less than 60 percent of
household income. Although sometimes on communal lands, farms were
mostly family operated, and households provided most of the labor. Only 17
percent of households hired labor to work on crop farms, and only 13 percent
of livestock farmers hired outside labor in 1992. Few households (4 percent)
used fertilizers and few (10 percent) purchased seeds (Okidi 1999).
On average, about 20 percent of the 1992/93 survey farm output was mar-
keted. However, farmers who did market their crop tended to farm on a larger
scale than those who did not. As a result, the share of the crop marketed was
greater than the share a typical farmer marketed. Generally, rural households
were largely self-reliant and consumed most of what they produced. Accord-
ing to the survey, one-third were subsistence farmers, while half marketed less
than 10 percent of their output. Of the farmers who grew cotton or coffee, the
primary cash crops in Uganda, most marketed 25 percent of their output or
more (figure 6.1). Farmers who grew cotton were also more likely to market
other crops (table 6.2). Still, few of either type marketed more than 25 percent
of their crops other than coffee or cotton (figure 6.2). The share of the crop
marketed also varied significantly from district to district. Farmers in Luwero
and Bundibugyo marketed 30 percent or more of their crop, while farmers in
Kotido, Moroto, and Soroti marketed less than 10 percent.
Nevertheless, the volumes sold were sufficient to give rise to local and
district markets throughout Uganda. For example, respondents in all but four
of the more than 800 communities surveyed noted that district markets were
accessible. In only 39 of the communities had accessibility been limited by
seasonal rains.
While crop markets were generally available, results from the household
surveys suggest that the volumes of particular crops reaching the general
market varied greatly. Moreover, household surveys indicate significant dif-
ferences in the number of farmers engaged in marketing each type of crop.
Table 6.3 reports the share of production marketed by crop. The shares range
from a low of 6 percent for sweet potatoes to 92 percent for coffee. The table
also reports the amount the average household markets. For export crops,
household averages for cotton and coffee match marketwide averages, but
for several crops—for example, cassava and sim-sim—the two averages are
significantly different, indicating that a smaller share of the farmers growing
Table 6.1. Percentage of Ugandan Households Engaged in Farming, 1992
Rural Urban Urban and rural

Livestock Livestock Livestock
Location Agriculture Crop farm farm Agriculture Crop farm farm Agriculture Crop farm farm
179
All Uganda 94.0 93.0 14.8 39.7 37.9 5.7 76.6 75.3 11.9
Central 91.2 88.9 14.4 33.4 29.9 6.7 70.0 67.2 11.6
Eastern 95.4 95.0 16.7 46.9 46.0 4.7 80.3 79.8 13.0
Northern 96.9 96.4 22.9 52.8 51.4 8.9 84.0 83.3 18.8
Western 92.7 92.0 6.1 30.0 28.8 2.8 73.5 72.7 5.1
Source: Okidi (1999).
Figure 6.1. Marketed Share, Cumulative Frequency by Share of Crop

Marketed, 1992/93
Marketed share by farm type

1.2
Cumulative frequency
1.0
0.8
0.6
0.4
0.2
0.0
0 10 20 30 40 50 60 70 80 90 100
Marketed share of production (percent)
All farms Cotton and coffee farmers

No coffee or cotton produced
Source: 1992/93 integrated household survey.
these crops supplied crop markets. Together, the results suggest that some
markets are thin and that these markets are supplied by a concentrated num-
ber of households.
Average margins—the difference between district and local market prices
expressed as a percentage of local prices—showed a great deal of heteroge-
neity among crops. Moreover, many are high in absolute terms (figure 6.3).
In addition to the low volumes and concentration of suppliers already men-
tioned, a number of additional reasons exist that may generate differences in
margins among crops. These reasons are discussed in the next section.
A Market Model for Community Trade

Generally, crop markets in Uganda, as in most developing countries, are cash
based. Performance risk is high and contract enforcement is weak. Informa-
tion systems are informal for many crops and often network based. Assur-
ances of all types—for quality and performance—tend to be based on repu-
tation and personal trust. Property rights are insecure. This contrasts with
most crop markets in industrial countries where transactions are impersonal
and formal institutions guarantee performance and deliver information
Crop Markets and Household Participation 181
Table 6.2. Number of Farms by Share of Output Marketed
Crops other than

Share All crops coffee or cotton
marketed Farms with Other Farms with Other
(percent) All farms cashcrops farms cashcrops farms
0 2,309 58 2,251 477 2,251
0–5 617 118 499 145 499
5–10 554 148 406 118 406
10–15 436 132 304 113 304
15–20 377 113 264 82 264
20–25 343 96 247 67 247
25–30 294 96 198 54 198
30–35 227 83 144 45 144
35–40 226 65 161 52 161
40–45 219 77 142 47 142
45–50 201 68 133 41 133
50–55 178 59 119 26 119
55–60 149 50 99 26 99
60–65 131 49 82 29 82
65–70 114 44 70 22 70
70–75 108 37 71 18 71
75–80 92 31 61 19 61
80–85 68 26 42 16 42
85–90 51 27 24 5 24
90–95 46 18 28 2 28
95–100 48 24 24 5 24
Total 6,788 1,419 5,369 1,409 5,369
Source: Author’s calculations from the 1992/93 integrated household survey.
(Fafchamps and Minten 1999 provide a good description of the differences

between formal and informal markets). Differences in how markets are orga-
nized are expected to affect outcomes as well. Transaction costs are generally
lower in formal, impersonal markets, and the development of the institu-
tions that promote such markets is considered key to long-term economic
progress (see, for example, North 1989). All other things being equal, lower
transaction costs result in lower marketing margins between communities
that generate opportunities for trade, specialization, and productivity gains.
In practice, formal and informal and personal and impersonal markets
often coexist (see Kranton 1996, for example). It is likely that common, ex-
isting marketing practices, despite limits, best solve the special circum-
stances associated with each market. Circumstances can differ among crops,
such that crop markets work differently in the same country, or even in the
same community. In turn, the way the market works affects transaction
Figure 6.2. Marketing of Crops Other Than Cotton and Coffee, 1992
2,500
2,000
Number of farms
1,500
1,000
500
0
0 10 20 30 40 50 60 70 80 90 100
Marketed share of production (percent)
Farms without cash crops

Farms with cash crops
Source: 1992/93 integrated household survey.
costs, marketing margins, and household choices, including the decision

even to enter markets at all. For crops largely produced and consumed lo-
cally—but not exported cash crops—household decisions will affect the
demand characteristics of the crop market, for example, the liquidity and
volatility of the local market and the quality of goods demanded. Conse-
quently, household choices and market organization are linked.
One way to measure how well markets work is to see if transfer costs ex-
plain differences in a given crop price among different villages. More formally,
the spatial arbitrage model stipulates that when trade takes place between two
locations, the observed crop price difference can be explained by the full cost
of transferring the crop between the two locations. If the difference becomes
larger, then traders will move enough of the crop between the two locations to
bring prices back in line. Consequently, price changes in one location will be
reflected in the other. When transfer costs are significant however, some price
differences will be too small to cover the cost of transferring the crop. Trade
will stop and prices can drift independently over some limited range. For esti-
mation purposes the spatial arbitrage model can be expressed as:
(6.1) Et[Pti + Ktij(w; c, s)] + λtij = Et(Ptj),
where Pi and Pj are the contemporaneous price of a commodity in markets i and
j; where Kij is the associated transfer cost, which is a function of the variable
Table 6.3. Share of Crop Marketed, by Crop

(percent)
Crop Average Typical household

Sweet potatoes 6 6
Millet 12 11
Sorghum 13 13
Cowpeas 16 7
Peas 17 11
Matooke 21 11
Other pulses, nuts, seeds 23 15
Irish potatoes 24 15
Beans 26 15
Maize cob 28 9
Bananas 34 39
Maize grain 35 22
Soybeans 40 24
Sim-sim 42 25
Groundnuts 49 16
Cabbage 62 36
Onions 64 33
Rice 66 49
Cassava 76 44
Cotton 76 74
Tomatoes 78 41
Coffee 92 91
Source: Authors’ calculations from the 1992/93 integrated household survey.
input prices w and fixed capital stock levels c, conditional on a set of state vari-
ables s; and where λ is a slack variable that equals zero when trade takes place
between markets i and j (Larson 2000). Variable input costs include labor, fuel,
and working capital. Capital stocks reflect past public or private investment.
Examples of capital include roads and communication infrastructure, but
may also include difficult to observe human or social capital investments, such
as past investments in reputation or in informal information systems. State
variables are not subject to choice, but nonetheless affect the way markets are
organized; that is, state variables affect choices by market participants about
how they will conduct trade. For example, a lack of contract enforcement may
encourage exchanges based on personal trust, differences in end-market con-
ditions among crops may give rise to varying levels of risk and uncertainty,
differences in security may lead to differences in risk by location, or govern-
ment policy may encourage smuggling some goods into the country.
The arbitrage model is a short-term measure of markets that asks whether
markets convey appropriate price signals and incentives, while taking as given
the condition of roads, the availability of information, the nature of demand,
and the capacity of institutions. In the longer term investments can be made,
Figure 6.3. Average Gross Margin between District and Local

Market Prices, 1992
Average margins
Cotton
Other pulses, nuts, seeds
Sim-sim
Irish potatoes
Millet
Groundnuts
Coffee
Sorghum
Maize cob
Peas
Cowpeas
Crop
Sweet potatoes
Maize grain
Cassava
Onions
Soybeans
Bananas
Tomatoes
Rice
Matooke
Beans
Cabbage
0 20 40 60 80 100 120 140 160
Share of local price (percent)
Source: Authors’ calculations based on 1992/93 integrated household survey.
demographic and income developments can change local demand, and in-
stitutions can evolve. Evidence from the 1992/93 surveys is helpful in ad-
dressing the larger issue of market development.
Crop Markets in 1992

The 1992/93 integrated household survey is especially valuable for research-
ers interested in spatial arbitrage. The questionnaire provides information
on price pairs—local and district—for crops in each community. While trans-
fer costs were not directly surveyed, community members were asked about
factors likely to influence the cost of transfer, such as the distance to the dis-
trict market and issues related to transportation and communications infra-
structure, including the distance to all-weather roads, public transportation,
rail stations, or a public telephone.
Community members were also asked to choose the best description of
credit access conditions and common marketing practices from a list. The
choices were discrete, for example, the credit access conditions included no
access, nearby access, access within 5 kilometers, and access within 10 kilo-
meters. Together, these discrete and continuous variables can be used to ex-
amine factors affecting marketing margins and differences in margins among
communities and among crops.
As discussed earlier, variations in community and marketing characteris-
tics can be used to proxy the transfer costs given in equation 6.2:
(6.2) Pic = bppicd + Σl blzil + Σm bmzmc + vic

where the price of crop i in community c is a function of the price of the same
crop in the district market d that survey respondents designate as most rel-
evant, a set of cost and state variables z = [w c s], and a random error v. The
matrix z includes continuous and dummy variables associated with l com-
munity characteristics and m crop characteristics, where the continuous vari-
ables are expressed in natural logs. Table 6.4 reports regression results based
on 3,326 price observations from 666 communities, and 31 crops reported in
the 1992/93 survey.1 A summary of the main findings follows.
PRICES. When interspatial arbitrage occurs, local prices are expected to

move together with district prices. The regression results suggest that local
and district markets are linked. All other attributes being equal, the regres-
sion results indicate that a 10 percent increase in the district price for any
crop would lead, on average, to a 9.4 percent increase in the local price. In the
narrow sense, markets do indeed work in Uganda. Prices in local markets
relate to markets in district markets.
INFRASTRUCTURE. The survey measures types of infrastructure likely to af-

fect transportation and transaction costs—distances to all-weather roads,
public transportation, rail stations, and a public telephone—in kilometers,
and local prices are expected to decline as these distances increase.
1. The model was estimated using the Mixed Model Procedure from SAS (1992).
About 140 communities were excluded because of missing values. In addition, not all
communities produced all crops. Estimates of community prices predicted from in-
strumental variables were used in the reported results, although ordinary least square
estimates were similar.
Table 6.4. Model Results for 1992/93 Survey
Continuous variables Estimate t-statistic

District price 0.936 47.48a
Distance to district market –0.003 –0.75
Phone –0.016 –2.52b
All-weather road 0.004 1.51
Public transport 0.000 0.07
Test for fixed effects χ2 statistic
District 305.91a
Crop 68.36a
Unit 75.83a
Credit availability 3.06c
Inventories available 48.93a
Marketing scale 0.39
Low district price 210.18a
a. Significant at the 99 percent confidence level.
b. Significant at the 95 percent confidence level.
c. Significant at the 90 percent confidence level.
Source: Authors’ calculations.
Transportation systems depend not only on the quality of the road that runs
near a community, but also on the quality of the roads to which it connects.
For example, in Kisoro District most communities are near all-weather roads,
while, on average, traders must cover nearly 24 kilometers of seasonal roads
to reach communities in Mukono District. A district effect is included in the
regression because the efficiency of local infrastructure is affected by trans-
portation and information systems and to compensate for missing informa-
tion on regional input prices.
Only the district effects and telephone variables were significant among
these variables. According to the regression results, decreasing the distance
to a telephone by 10 percent would lead to a 1.6 percent increase in local
prices. Individually, district effects are not expected to have a specific sign,
but taken together, the district effects are statistically important in explain-
ing observed price differences. The effects of the other variables, including
distance and road quality, are not significant. As with prices, these results are
robust under a number of alternative assumptions, which we discuss later.
CROP EFFECTS. The relationship between transport costs and infrastructure

is likely to differ among crops. For example, poorly maintained roads might
greatly affect the cost of matooke (plantain) transport because of bruising. Such
differences are important when infrastructure and distance are used to proxy
transfer costs, because they imply differences in parameter values. More-
over, just as farmers choose among different production technologies based
on their own needs and the risks and benefits associated with the various
approaches, market participants will decide on strategies based partly on the
physical and market characteristics of the crop. For example, quality might
be relatively more difficult to gauge for some crops, or the crop might spoil
more readily. The demand and information characteristics of crops markets
will likely differ as well, especially between export and food crops. Conse-
quently, we include crop dummies in the estimation, which proved signifi-
cant (table 6.4).
PHYSICAL UNITS OF MEASURE. There is no standard unit of measurement for

most commodities traded in rural Uganda. Coffee and cotton are generally
measured in kilograms, but many communities trade other crops in local
measurement units, for example, cans of various sizes. Altogether, the 1992
community survey data include 22 units of measure with each of the 31 crops
measured in more than one unit. Fortunately, respondents quoted local and
district prices in similar units.
The Ugandan Bureau of Statistics provides a table of detailed conversion
rates for the units so that, potentially, prices could be converted into stan-
dard units. Early experimentation with the data showed that the conversion
process itself introduced additional, and sometimes large, increases in price
variability. In part, these differences may reflect true transformation costs,
that is, the cost of sorting, grading, packaging, and so forth. Furthermore,
units may indicate quality and information differences that are lost during
conversion. For example, a heap (a unit of measure in the survey) is an inex-
act measure and probably indicates a sack weighing less than 50 kilograms.
For estimation purposes, prices were converted to logs, but fixed unit effects
were included to account for quality of product and information effects (see
Deaton 1997 for a good discussion of quality in the context of consumer de-
mand). These proved highly significant.
CREDIT. Working capital is required to trade crops, and often the volume of
a trader’s business is limited by lack of credit.2 Access to credit is likely to differ
according to the crop. The role of credit and its availability may also contribute
to differences in transfer costs among crops. For example, credit may be more
readily available for export crops than for food crops, because cotton ginneries
and coffee hullers and exporters will often finance their purchasing agents,
sometimes by passing through offshore financing from buyers. Furthermore,
for storable crops, the cost of storage that, in turn, is affected by access to credit,
will affect price variability. This is significant, because most communities re-
port that formal bank credit is unavailable (505 out of 666 communities, or 76
2. See Jones’ (1972) account of the crop trade in Senegal; or more recently, Barrett’s
(1997) account of traders in Madagascar; or Baulch, Jaim, and Zohir’s (1998) account
of grain markets in Bangladesh.
percent). Working capital is required to arbitrage markets, so access to credit is

expected to be an important determinant of local prices. The regression results
are mixed. Local prices increase by about 4 percent when credit is available;
however, the result is statistically significant at a somewhat lower (91 percent)
level of significance.
STATE VARIABLE 1: INVENTORIES. When commodities are storable, owners

not only decide whether to sell their crop locally or in another town, but
they also decide whether to make that decision today or tomorrow. More
specifically, when crops can be stored, prices must meet an intertemporal
condition as well as the spatial arbitrage condition (Larson 1994). Using a
simulation model, Williams and Wright (1991) show that spatial and tem-
poral arbitrage work together to reduce price volatility and decrease the
volume of trade needed to bring spatial markets into equilibrium. When
stock-outs occur, the intertemporal condition need not hold. For crops that
are not continuously produced, a lack of inventories may also signal that
the crop is unavailable for trade. By drawing on the household survey, we
generated a dummy variable to identify observations in which community
members held stocks of a particular commodity. We included the variable
in the regression, which proved significant (table 6.4).
STATE VARIABLE 2: FAILURE TO COVER TRANSFER COSTS. When transfer costs are
high relative to the price of the commodity, there is a large range of positive
district prices over which trade will not occur. If such a condition prevailed
in a large number of observations, the regression results could be biased. To
address this possibility, we sorted the observations by crop and ranked by
district price level. A dummy variable was included in the regression and set
to one when an observation contained a district price among the bottom 20
percent of district crop prices. This dummy variable also proved significant.
STATE VARIABLE 3: COMMUNITY MARKETING ORGANIZATIONS. Often farmers will

organize formal or informal associations for marketing purposes to reduce
transportation costs, to strengthen negotiating positions, or to take advan-
tage of other economies of scale. Survey participants were asked to choose
among four options that describe how crops are organized for market: by
individual farmers, by small groups, by large groups, or by formal coopera-
tives. We included these responses in the regression as fixed effects (market-
ing scale variable). The model results suggest, however, that marketing crops
collectively has little influence on the prices observed in local markets.
Explaining Differences among Communities

The questionnaire covers both communities and commodities and a regres-
sion of the type reported earlier attempts to explain the variation in prices due
to both, making it possible to decompose the variation into parts (Mundlak

1978). By averaging across commodities in any given community, it is possible
to examine the determinants of community differences and explain why, on
average, prices are higher in one community than another. Table 6.5 reports
these between community regression results. As expected, distance and road
quality are highly significant in explaining this portion of the total sample varia-
tion. Nevertheless, the effects remain quantitatively small.
Together with the results from the earlier regression, these results sug-
gest that investments in infrastructure are important in explaining why crops
generally receive a higher price in communities that have good access to trans-
portation. The results also suggest that much of the price spread among com-
munities is to be found in crop differences and that infrastructure does little
to explain this portion of price variation. This point is also brought out by the
crop model results discussed next.
Crop Models
Using the 1992/93 survey, the model was estimated by crop.3 Table 6.6 pro-
vides selected results from the crop models that are largely consistent with
the aggregate models. The price parameters are consistently significant and
quantitatively close to one. For the most part, transport and communication
variables were not statistically different from zero. Together with the earlier
results, this suggests that the differences among crops—both the physical
nature of the crop and the associated market characteristics—largely deter-
mine differences among crop marketing margins.
Table 6.5. Explaining Differences in Average Community Price Levels
Variable Estimate t-score

Price 0.958 350.81a
Distance
To market –0.005 –2.93a
To phone –0.003 –1.45b
To all-weather road –0.004 –4.17a
To public transport –0.003 –2.83a
Note: R2 equals 0.975.
a. Significant at the 95 percent confidence level.
b. Significant at the 90 percent confidence level.
Source: Author’s calculations based on 1992/93 integrated survey
3. In this version of the model unit effects were dropped to save on degrees of
freedom.
Table 6.6. Community Prices: Crop Model Estimation Results
190
Distance to Distance to
District price Distance to market Distance to phone all- weather road public transport Distance to rail stop
Probability Probability Probability Probability Probability Probability
Crop Estimate >|t| Estimate >|t| Estimate >|t| Estimate >|t| Estimate >|t| Estimate >|t|
Bananas 0.923 0.000 –0.056 0.148 –0.183 0.032 0.011 0.693 –0.158 0.258 0.104 0.479
Beans 0.992 0.000 –0.018 0.104 –0.056 0.014 –0.016 0.064 –0.004 0.744 –0.039 0.033
Cabbage 1.104 0.000 0.006 0.878 –0.208 0.208 0.004 0.896 0.027 0.659 –0.391 0.050
Cassava 0.925 0.000 0.002 0.854 –0.053 0.017 0.026 0.006 0.000 1.000 0.048 0.028
Coffee 0.931 0.000 –0.007 0.410 0.017 0.264 0.008 0.211 0.002 0.779 –0.012 0.361
Cotton 0.969 0.000 –0.015 0.372 0.017 0.577 0.000 0.978 0.004 0.670 –0.016 0.394
Cowpeas 1.064 0.000 –0.163 0.057 0.260 0.231 0.062 0.048 –0.011 0.797 –0.263 0.251
Groundnuts 0.995 0.000 –0.017 0.222 –0.024 0.318 –0.007 0.439 –0.015 0.159 0.070 0.010
Irish potatoes 0.934 0.000 –0.069 0.051 0.019 0.711 0.019 0.425 0.010 0.789 0.002 0.961
Maize cob 0.978 0.000 0.025 0.319 0.153 0.007 0.039 0.029 –0.005 0.784 –0.098 0.180
Maize grain 0.944 0.000 –0.003 0.851 0.028 0.293 0.008 0.429 –0.013 0.265 0.012 0.657
Matooke 0.875 0.000 0.004 0.749 0.007 0.673 0.004 0.649 0.004 0.797 0.005 0.717
Millet 0.967 0.000 0.003 0.841 0.033 0.196 –0.013 0.100 0.011 0.248 –0.001 0.939
Onions 1.110 0.000 0.005 0.943 –0.080 0.595 0.011 0.771 –0.011 0.878 0.287 0.076
Other pulses,
nuts, seeds 0.875 0.000 –0.211 0.343 0.222 0.016 –0.017 0.276 0.079 0.002 0.007 0.934
Peas 1.168 0.000 –0.078 0.311 –0.055 0.830 –0.091 0.153 0.147 0.074 –0.051 0.431
Rice 0.881 0.000 –0.008 0.752 –0.038 0.215 0.019 0.230 0.002 0.919 0.018 0.628
Sim-sim 0.950 0.000 –0.014 0.442 –0.036 0.487 –0.014 0.190 –0.013 0.266 0.021 0.510
Sorghum 0.949 0.000 –0.002 0.944 0.042 0.358 –0.019 0.089 –0.002 0.887 0.018 0.481
Soybeans 0.974 0.000 0.008 0.740 –0.033 0.428 0.031 0.126 0.028 0.215 –0.007 0.849
Sweet potatoes 0.865 0.000 –0.011 0.461 –0.003 0.892 –0.003 0.783 0.001 0.932 –0.015 0.429
Tomatoes 1.169 0.000 –0.013 0.697 –0.044 0.682 0.038 0.116 –0.039 0.414 0.017 0.712
Source: Reported estimation results based on the 1992/93 integrated household survey.
The Determinants of Market Participation
Transfer costs in commodity markets set bounds on potential gains from trade
for poor rural households. Most analysts recognize that rural households in
many poor countries and regions face imperfect markets.4 Apparent from
the analysis above, differences prevail among commodity markets. More-
over, since transfer costs are also partly determined by distance to market,
credit markets, and other community characteristics, the set of relative prices
and the characteristics of the markets faced by households will differ by lo-
cation. In turn, the capacity of households to produce, take on risk, and par-
ticipate in commodity markets will differ from household to household. Con-
sequently, some households may choose to participate in commodity output
markets while others do not. Moreover, participation in some commodity
markets may be more attractive to households than participation in other
markets. As already discussed, survey data show that, in general, few rural
households participate significantly in crop markets. This section examines
the determinants of the decision to participate.
Formally, we assumed that conditional on the state variables, households
formulate a decision price, th,i , which when compared with market prices, trig-
gers their participation in markets; that is, yh,i ≥ 0, for ph,i ≥ th,i(H, I, E, V), where
y is the share of crop i production marketed by household h; and where H, I, E,
and V are state variables representing household, commodity, enterprise, and
community characteristics (de Janvry, Fafchamps, and Sadoulet 1991). Because
the decision price is unobserved, the following relationship is estimated:
(6.3) yh,i = s(ph,i ; (Hh, Ii, Eh, Vh).
Table 6.7 provides estimates of household participation in Ugandan crop
markets based on nearly 11,700 observations from the 1992/93 survey. The
subsequent sections discuss the implications of the key results.
Prices
Relative prices are important when farmers decide how much of their crop to
market. On average, across all crops, a 10 percent increase in price will result in
a 2 percent increase in the amount of the crop sold. The source of the price
increase can be a general rise in district-level prices or a decrease in transfer
costs. The latter point is significant, given the relatively large margins associ-
ated with many of the food crops. Furthermore, the 0.2 participation elasticity
is in addition to household supply elasticities, that is, households can produce
4. For example, Ellis (1993, p. 13) provides the following definition: “Peasants
are households which derive their livelihoods mainly from agriculture, utilise mainly
family labour in farm production, and are characterised by partial engagement in
input and output markets which are often imperfect or incomplete.”
191
Table 6.7. Market Participation: Household Tobit Results
Variable Estimate χ2 statistic Probability > χ2

Price 0.20 23.27 0.00
Market characteristics
Crop effects (joint significance) n.a. 2,255.82 0.00
Region effects (joint significance) n.a. 195.49 0.00
Household characteristics
Size of household –0.01 0.14 0.71
Male head of household 0.05 4.37 0.04
Education of household head
(joint significance) n.a. 8.20 0.04
None –1.13 2.52 0.11
Primary –1.08 2.31 0.13
Secondary –1.11 2.43 0.12
Sources of capital
From savings/family –0.18 1.66 0.20
From government/NGO 0.08 0.12 0.73
Money lender 0.03 0.06 0.81
Formal credit –0.46 3.11 0.08
Enterprise characteristics
Number of paid workers 0.01 4.98 0.03
Number of unpaid workers –0.10 37.22 0.00
Investment capital 0.04 26.13 0.00
Community characteristics
Distance to market 0.00 2.48 0.12
Distance to phone –0.03 15.91 0.00
Distance to all-weather road 0.00 2.25 0.13
Common method of sale
Sold by cooperative –0.23 0.46 0.50
Sold by individual farmer 0.06 0.15 0.70
Sold by large group 0.09 0.28 0.60
Note: Continuous variables not already expressed as shares were converted to natural logs
prior to estimation.
Source: Estimates based on 1992/93 integrated household surveys.
for either home consumption or for market. Consequently, all other things be-
ing equal, a permanent reduction in transfer costs would result in both an in-
crease in output and an increase in the share of output marketed.
Market Characteristics
Crop markets have different information and storage characteristics that influ-
ence household marketing decisions in the same way they influence markets
between communities. In the regression, crop effects and regional effects were
significant when taken as a group. Table 6.8 reports the estimated crop effects
individually. Among the crops, farmers were more likely to export a greater
share of traditional export crops.
Household Characteristics
Among the household characteristics included in the regression, the gender of

the household head proved significant: male heads of households were more
likely to participate in crop markets. The size of the family and differences in
Table 6.8. Estimated Fixed Commodity Effects
Commodity Estimated effect χ2 Probability > χ2

Coffee 1.33 6.13 0.01
Other fruit 1.22 4.70 0.03
Cotton 1.21 5.09 0.02
Tomatoes 0.97 3.14 0.08
Tobacco 0.95 2.94 0.09
Sugar cane 0.90 2.19 0.14
Rice 0.87 2.61 0.11
Onions 0.85 2.41 0.12
Other cash crop 0.84 1.22 0.27
Other grains 0.81 1.92 0.17
Cabbage 0.72 1.66 0.20
Oranges 0.67 1.11 0.29
Pineapples 0.65 1.08 0.30
Soybeans 0.50 0.88 0.35
Maize grain 0.38 0.50 0.48
Bananas 0.37 0.46 0.50
Sim-sim 0.37 0.47 0.49
Peas 0.24 0.19 0.66
Maize cob 0.14 0.07 0.79
Groundnuts 0.14 0.07 0.80
Beans 0.06 0.01 0.91
Sorghum 0.03 0.00 0.95
Millet 0.02 0.00 0.98
Matooke 0.00 0.00 1.00
Irish potatoes –0.01 0.00 0.99
Other vegetables –0.02 0.00 0.97
Other pulses, nuts, seeds –0.10 0.03 0.86
Cassava –0.17 0.10 0.75
Cowpeas –0.24 0.19 0.66
Sweet potatoes –0.31 0.32 0.57
Note: Fixed effect for yams excluded.
Source: Authors’ fixed-effect parameter estimates.
educational attainment were not important in explaining market participa-

tion, nor were differences in the sources of credit important. The coefficient on
formal credit sources was significant, although not of the expected sign. This
may well be coincidental, because less than 2 percent of the sample included
households with credit obtained from formal sources.
Enterprise Characteristics
Past investment reflected in current investment capital levels was significant
in explaining differences in market participation rates. The number of paid
employees was associated with greater market participation, that is, enter-
prises with commercial outputs also participated in formal labor markets.
The opposite was also true, and farms that relied on unpaid—usually family—
labor were also less likely to market their output.
Community Characteristics
The effects of community characteristics, which are important to trade among
communities, are likely to be reflected in farm-gate prices. They may also
play a role in the type of information households receive and the range of
opportunities available to households. Among the community characteris-
tics included in the regression, only access to telephones proved both quan-
titatively and statistically significant.
The Effects of Price Changes on Household Welfare

Crop models provide a way to quantify the effects of exogenous changes in
district prices on community prices. However, the quantitative significance of
such changes on welfare is not clear, because the relationship between local
prices, district prices, and community market characteristics differ among crops;
market characteristics differ among communities; and the composition of pro-
duction differs among farms. Fortunately, the 1992/93 household survey con-
tains information on the composition of household production and also pro-
vides a way of linking households with communities. Linking the crop pricing
models with the household composition data provides a way of measuring
the welfare effects of changes in policy and public investment. Annex 6.1 ex-
plains how the welfare measure was calculated.
The model results discussed earlier suggest that changes in district prices
are reflected in local prices (table 6.4). In turn, tradable crop prices are linked to
international prices. However, in 1992/93 Uganda households were only par-
tially linked to formal crop markets, because most households marketed only
a small share of their output. Cash crops were the exception. Table 6.9 shows
the effects of a simulated 10 percent increase in cash crop prices. The change is
significant, but mostly for a concentrated group of households. This is because
Table 6.9. Welfare Effect of a 10-Percent Increase in Cash Crop Prices

(percent)
Range Share of households Average change

0–1 84.8 0.0
1–2 4.6 1.5
2–3 3.1 2.4
3–4 2.4 3.5
4–5 1.3 4.4
5–6 1.2 5.5
6–7 0.8 6.5
7–8 0.7 7.5
8–9 0.4 8.5
9–10 0.3 9.4
10–11 0.2 10.5
11–12 0.2 11.6
12–13 0.2 12.4
Total 100.0 0.6
Source: Authors’ simulation.
Ugandan households choose production diversification as a survival and risk

management strategy. As might be expected, a price increase also has regional
effects. Coffee appears to dominate the results, with coffee-growing districts
like Kasese showing greater changes under the simulation.5
Because of the composition of production, gains from temporary price
movements are also small and unlikely to contribute in a significant way to
the accumulation of household assets. In contrast, reductions in transfer costs
will improve the household terms of trade in a permanent way. Results from
the previous section suggest that, all other things being equal, farmers would
consequently increase their market participation. Moreover, changes in trans-
fer costs may lead to reduced risk levels as well. As a result, the true devel-
opment impact of improvements in crop markets are likely to come from
changes in household production and market participation made in response
to new opportunities.
Are Crop Markets Developing?

This section considers subsequent evidence that suggests that crop markets
are developing in Uganda. In 1992 crop markets worked in the sense that
5. Note that an export tax—sometimes proposed to stabilize exchange rates dur-

ing a boom—would have exactly the opposite results.
relevant price signals were relayed among markets. Transfer costs, however,
were high and differed significantly among crops. Most households engaged
in farming and consumed most of what they produced. Rural households
did not specialize in other sector activities nor did they specialize in produc-
ing particular crops that would give rise to growing food crop markets. Clearly
there was scope for transaction costs to fall, and for crop markets, especially
food crop markets, to deepen.
Increased Participation in the 1990s

Subsequent household surveys show small but steady changes in income
levels and sources of income, which together suggest some growth in the
domestic demand for food crops (see book appendix A for surveys). Changes
in the survey instruments make some comparisons difficult; nevertheless, it
appears that between 1992 and 1995 real income levels grew as did income
from wages (table 6.10). At the same time, the share of household income
from farming grew between 1992/93 and 1994/95. Moreover, the percentage
of heads of households reporting agriculture as their primary occupation
grew between 1992/93 and 1995/96 (table 6.11). Using the same household
data, Okidi (1999) reports some changes in the composition of household
production, including a greater role for coffee, but it is difficult to tell if this
result is due to changing prices only. A change in the way the survey was
conducted further obfuscates any changes in the composition of household
production. Nevertheless, there is some evidence from the early surveys to
suggest that households became significantly more integrated into crop mar-
kets during this period.
In 1999/2000, a revised household survey included questions about mar-
ket participation, not only for the period coinciding with the survey, but for
previous years as well. Partial and preliminary data from the 1999/2000 sur-
vey provides strong evidence that farmer participation is increasing.
Table 6.12 reports results from a probit regression that predicts participa-
tion in crop markets based on the household characteristics of the respondents.
The regression suggests that the availability of storage facilities and of market
information are important determinants of market participation. The use of
high-yielding seed varieties (proxy for the technical sophistication of the farmer)
was not significant, but having at least one visit by an extension officer was
significant. In addition, separately included time effects suggest that market
participation increased significantly between the early surveys of 1992/93 and
1994/95 and the subsequent surveys in 1995/96 and 1999/2000.
This general result—that farmers report increasing participation in for-
mal markets over time—remains at odds with participation as measured by
the share of income from formal markets. Nonetheless, the results suggest at
least a perception of increased use of formal markets. Moreover, the positive
effect of extension on participation reinforces the earlier finding that infor-
mation is an important component of market development.
Table 6.10. Household Income by Source, 1992–96
Share of income from

Total household income agriculture Share of income from
(U Sh 1,000) (percent) all wages (percent)
Location 1992/93 1994/95 1995/96 1992/93 1994/95 1992/93 1994/95 1995/96
197
All Uganda 54.2 69.5 74.6 49.4 51.7 12.0 13.5 15.7
Central 68.9 104.2 103.7 42.7 40.4 18.7 19.8 20.5
Eastern 49.9 51.5 64.2 49.4 54.7 9.7 10.8 15.4
Northern 42.8 46.7 50.1 52.1 61.8 5.6 7.7 9.3
Western 50.3 56.2 67.4 55.4 57.3 11.4 11.4 14.6
Table 6.11. Main Occupation of Household Head, 1992 and 1995
(percent)
Self-employed Employed
Agriculture Nonagriculture Agriculture Nonagriculture
Location 1992 1995 1992 1995 1992 1995 1992 1995
198
All Uganda 57.3 63.2 20.1 16.0 3.2 3.1 19.5 17.8
Central 50.8 57.4 17.6 18.7 5.0 5.0 26.6 18.9
Eastern 60.9 63.9 15.2 16.3 1.6 2.1 22.3 17.8
Northern 59.9 69.1 33.7 11.6 1.1 1.2 5.3 18.1
Western 58.7 64.3 16.3 15.9 4.4 3.4 20.7 16.4
Table 6.12. Explaining Positive Responses to “Did You Sell Your

Output?”
Variable Estimate z Probability >|z|

Storage facility 0.47 3.75 0.00
HYV, 1–20% –0.31 –1.15 0.25
HYV > 20% –0.15 –0.81 0.42
Number of extension visits
One 0.62 2.88 0.00
Two to three 0.54 2.50 0.01
More than three 0.51 2.21 0.03
Received market information
Somewhat useful 0.64 5.13 0.00
Useful 0.37 2.28 0.02
Year effect
1994 0.10 0.79 0.43
1996 0.25 2.05 0.04
1999 0.26 2.17 0.03
HYV High-yielding varieties.
Source: Estimates based on preliminary data from 1999/2000 national household survey.
Crop Market Results from Subsequent Surveys

The community surveys of 1992/93, 1993/94, and 1995/96 asked different
questions about crop prices. Only the 1992/93 survey asked about district
prices. The 1993/94 survey inquired about local prices and prices in the most
common market, and the 1995/96 questionnaire asked about farm-gate prices
and most common market prices. Moreover, information on infrastructure,
credit access, and marketing practices was more limited in the 1993/94 and
1995/96 surveys. Consequently, putting together a panel as detailed as the
model applied to the 1992/93 data is not possible.
It is feasible to use the 1993/94 and 1995/96 data together and separately
in a limited way. Using the 1993/94 survey, observed nearest market prices
were regressed on most common market, distance to market, infrastructure
measures, and fixed effects for crop, unit, and region. Distance to market was
assumed to equal the distance to the most important produce market minus
the distance to the local market. When the distance was zero, the observation
was dropped on the assumption that the local market was also the most im-
portant one. Because of the way the question was asked, one cannot unam-
biguously associate the distance variable with a market pair. Similarly, the
1995/96 survey can be used by regressing farm-gate prices on producer prices
in the most common market, transport infrastructure, and fixed effects. The
distance between farm and community must, unfortunately, be ignored.
Despite ambiguities about distance, the regression results are quite similar
to the results from the better-designed 1992/93 survey (table 6.13) and broadly
support earlier findings. Prices in related markets largely explain that local
prices and quality effects are important. Crop and regional effects turn up sig-
nificant for the 1995/96 survey, but not for the 1993/94 survey. Transportation
infrastructure effects are neither large nor significant. Unfortunately, commu-
nication or other types of information measures were not available.
Evidence on Transfer Costs

As discussed earlier, even when markets are integrated and arbitrage condi-
tions hold, high transfer margins encourage self-sufficiency and limit the
benefits of trade. Nevertheless, markets are an amorphous blend of informa-
tion, business practices, institutions, credit, and transport costs. Thus an ad-
ditional question of interest then is how marketing margins have changed
over time given the many changes to the Ugandan economy.
One cannot make direct comparisons of margins over time because of
changes to the surveys. A related question, however, can be addressed: Have
average spreads between observed market prices and district averages de-
clined over time? This is done by regressing local most common crop prices,
available in both the 1993/94 and 1995/96 surveys, against transportation
variables and crop, unit, and regional dummies together with a year dummy.
Table 6.13. Results from the 1993 and 1995 Surveys
1993/94 survey 1995/96 survey

Variable Estimate t-score Estimate t-score
Price 0.952 37.840 0.921 59.610
Distance to
market 0.000 –0.170 –0.004 –1.060
Distance to tarred
road 0.004 0.690 0.003 1.020
Distance to public
transport –0.007 –1.510 0.002 0.490
Distance to rail
stop –0.032 –1.010 –0.004 –0.870
Tests for fixed

effects χ2 statistic Probability > χ2 χ2 statistic Probability > χ2
Crop 23.300 0.669 99.860 0.0001
Unit of measure 36.060 0.003 41.800 0.0001
Region 22.220 0.507 88.190 0.0001
Source: Based on 1992/93 and 1995/96 household surveys.
Together, the crop, unit, and regional dummies take on the value of the
regional average price for a particular crop in a particular unit of measure.
The year dummy takes on a value of one for 1993/94 observations and is
otherwise zero.
The results are given in table 6.14 and answer yes to this question, that is,
average spreads have fallen with all other things being equal. In fact, the
regression results imply that the spread between the two surveys fell by ap-
proximately 32 percent, suggesting that opportunity for trade increased for
most communities.
Evidence on Changing Domestic Demand

In rural communities where most households are largely self-sufficient in
food, there is scant and inconsistent demand for local food crops. When trans-
portation costs are high and the information supply is low, households can-
not depend on markets for food crops to generate income. In contrast, an
export market always exists for coffee, although the price may be uncertain.
As already noted, improving communications and access to information can
lower uncertainty and transaction costs. Changes in the composition of the
economy that lead to a consistent demand for local food crops can do the
same. Evidence from national accounts suggests this has been happening to
some extent in recent years. Nevertheless, the number of households engaged
in agriculture has not fallen, and rural incomes remain highly dependent on
agriculture. As discussed in chapter 2, a significant portion of growth has
come from the formal nonagricultural sectors of the economy. To the extent
Table 6.14. Modeling District Spreads
Variable Estimate Probability > |t|

Distance to market 0.00005 0.993
Distance to tarred road –0.01178 0.024
Distance to public transport 0.00739 0.107
Distance to rail stop –0.00603 0.511
Tests for fixed effects χ2 statistic Probability > χ2

Crop 952.81 0.0001
Unit of measure 6,166.28 0.0001
Region 167.15 0.0001
Year 88.49 0.0001
Test that year effects are the same Estimate Probability > |t|
1995 effect + 1993 effect –0.38688 0.0001
Source: Authors’ calculations.

that the changing composition of the economy continues to reflect changing

specialization by households, consistent demand for local food crops will
create incentives for greater participation by farming households in formal
markets for food crops.
Conclusions and Policy Implications

Information from community and household surveys conducted in 1992/
93, 1993/94, and 1995/96 and partial survey results from 1999/2000, to-
gether with modeling work, suggest that household participation in crop
markets is limited. The consequences are less severe for export crops that
eventually make their way into international markets. For food crops, how-
ever, the lack of domestic participation most likely results in illiquid mar-
kets. Gross margins between local and district markets for most food crops
are large, both absolutely and relative to cash crops. This fact alone would
encourage self-sufficiency in food crops and trade in cash crops. Large mar-
gins and high transfer costs also imply a large range of positive prices that
fail to cover transfer costs, increasing the risks of going to market when
prices are uncertain. Units of measure, which probably indicate quality dif-
ferences, are important determinants of local prices relative to district prices,
suggesting that demand markets are further fragmented by uncertainty
about quality. Together these factors indicate that marketing food crops is
riskier than marketing export crops, encouraging households to remain both
self-sufficient and diversified in their production. The mechanism is self-
enforcing, because a lack of specialization also limits the demand for local
food crops and the depth of local markets.
Despite high margins, there are no indications of widespread market fail-
ure. Results from a spatial arbitrage model suggest that district and local
markets are integrated to the extent that local prices largely reflect district
prices once transfer costs and commodity quality characteristics are taken
into account. This sign of market integration is significant and fundamental,
because the most basic economic measures of income, poverty, and welfare
are premised on the notion that prices are comparable across time and space.
Although differences among the surveys make comparisons difficult,
evidence indicates that crop markets are improving and that transfer mar-
gins fell between 1992 and 1995. Nevertheless, in 1995 most rural house-
holds were still engaged in self-reliant farming, and their participation in
crop markets remained limited. Working markets were not sufficient to
coax many poor households out of self-sufficiency. In addition, while in-
vestments in infrastructure that are statistically significant can explain
average crop price differences among communities, the quantitative im-
pact of public investment in infrastructure—in the short run—appears to
be small. Access to telecommunications and credit seems to be significant
for crop markets, but again, the estimated short-run benefits are small.
Nonetheless, the benefits of public investments in infrastructure and ac-

cess to credit probably extend beyond crop markets, and policies toward
investments in infrastructure must include a balanced consideration of the
effects of public investments in infrastructure.
Taken together, the survey and modeling results suggest that the prob-
lems in crop markets up to 1995 were symptomatic of limited specialization
in the Ugandan economy and labor markets. More recent sectoral income
data suggest that this is changing and the economy is becoming more di-
verse. Consequently, policies that enable households to accumulate savings
and human and physical capital and, thereby, take on the additional risks of
specialization, are likely to result in improved crop market performance. In
tandem, government support for the public and private institutions that
strengthen crop markets by reducing price, quality, and transaction uncer-
tainty can speed the development of crop markets.
Annex 6.1. Calculating Household Welfare

From the 1992/93 integrated household survey, crop production shares were
calculated for each of the nearly 6,000 households in the sample and crop
weights were calculated, so that:
(A6.1) wch = vch/ Σc vch,
where h denotes households, c denotes crops, and v represents a value of

production calculated from the household survey. Price changes, dpc , were
simulated under different scenarios. The two series were then combined to
provide a Laspayres measure of welfare change:
(A6.2) ∆Lh = Σ dpcwch.

c
Because households would reevaluate their optimization strategy in light of

a relative price change, the Laspayres measure gives a lower-bound estimate.
References
Barrett, C. B. 1997. “Food Marketing Liberalization and Trader Entry: Evi-
dence from Madagascar.” World Development 25(5): 763–77.
Baulch, Bob, W. M. H. Jaim, and Sajjad Zohir. 1998. “The Spatial Integration
and Pricing Efficiency of the Private Sector Grain Trade in Bangladesh.”
Briefing paper. Institute of Development Studies, Brighton, United
Kingdom.
Deaton, Angus. 1997. The Analysis of Household Surveys: A Microeconometric

Approach to Development Policy. Baltimore, Maryland: The Johns
Hopkins University Press.
de Janvry, Marcel Fafchamps, and Elisabeth Sadoulet. 1991. “Peasant House-
hold Behaviour with Missing Markets: Some Paradoxes Explained.”
Economic Journal 101(409):1400–17.
Ellis, Frank. 1993. Peasant Economics: Farm Households and Agrarian Develop-
ment. Cambridge, U.K.: Cambridge University Press.
Fafchamps, Marcel, and Bart Minten. 1999. “Property Rights in a Flea Market
Economy.” Working Paper no. WPS/99.25. University of Oxford, Cen-
tre for the Study of African Economies, United Kingdom.
Jones, William. 1972. Marketing Staple Food Crops in Tropical Africa. Ithaca, New
York: Cornell University Press.
Kranton, Rachel. 1996. “Reciprocal Exchange: A Self-sustaining System.”
American Economic Review 86(4): 830–51.
Larson, Donald F. 1994. “Copper and the Negative Price of Storage.” Policy
Research Working Paper no. 1282. World Bank, Development Research
Group, Washington, D.C.
_____. 2000. “Measuring Market Development: Crop Markets in Uganda.”
World Bank, Development Research Group, Washington, D.C. Pro-
cessed.
Martin, Anne. 1962. The Marketing of Minor Crops in Uganda: A Factual Study.
London: Her Majesty’s Stationery Office.
Mundlak, Yair. 1978. “On the Pooling of Time Series and Cross-section Data.”
Econometrica 46(1): 69–85.
North, Douglas. 1989. “Institutions and Economic Growth: An Historical In-
troduction.” World Development 17(9): 1319–32.
Okidi, John A. 1999. “Regional Growth Disparities and Household Economic
Performance in Uganda.” Research Series no. 17. Economic Policy
Research Centre, Kampala. Processed.
SAS Institute, Inc. 1992. “SAS Technical Report P-229, SAS/STAT Software:
Changes and Enhancement, Release 6.07.” Cary, North Carolina.
Williams, Jeffrey C., and Brian Wright. 1991. Storage and Commodity Markets.
Cambridge, U.K.: Cambridge University Press.
Part III
Firm Responses and Constraints

7
Confronting Competition: Investment,

Profit, and Risk
Ritva Reinikka and Jakob Svensson
This chapter examines the investment performance of the private firm

sector. The ensuing analysis is based mostly on the Uganda enterprise
survey carried out in 1998 (for survey details, see appendix B at the end
of the book). Household enterprises, the focus of chapters 5 and 6, are
also part of the private sector, but they are typically very small (micro)
enterprises. This chapter focuses on larger firms, that is, firms with five
or more employees. As Collier and Reinikka argued in chapter 2, given
the capital flight and the depletion of capital stock during the 1970s and
1980s, sustained growth and reduction in poverty beyond recovery re-
quire a strong private investment response. Collier and Reinikka’s mac-
roeconomic data show that investment as a share of gross domestic prod-
uct increased in the 1990s, but is still well below, say, that of East Asian
countries. This chapter analyzes the microeconomic or firm-level evidence
of private investment.
How important is investment generally for economic growth? Invest-
ment or physical capital accumulation has long played a central role in the
The findings reported in this chapter are based on data from the 1998 Uganda
enterprise survey, which was carried out by the Uganda Manufacturers Association
Consultancy and Information Service on behalf of the Ugandan Private Sector Founda-
tion and the World Bank, and was managed by William Kalema and Frances Nzonsi.
The survey design benefited from the Regional Program on Enterprise Development
and contributions from Andrew Stone. Alex Bilson-Darku, and Mimi Klutstein-Meyer
assisted in data analysis. Useful comments were received from participants at the an-
nual seminar on the Ugandan economy, organized by the Economic Policy Research
Centre (Kampala) in May 1999, as well as from Catherine Pattillo and Francis Teal.
207
208 Ritva Reinikka and Jakob Svensson
literature on economic growth and development. Few economic ideas are

as intuitive as the notion that increasing investment is a good way to raise
output and income. Recent empirical research also supports this view—the
rate of investment is robustly and positively correlated with the rate of eco-
nomic growth in cross-country, long-run growth regressions.
Early research on growth and investment took a rather mechanical ap-
proach: growth was constrained by a lack of investment that, in turn, was
constrained by a lack of finance (see Easterly 1997). Consequently, if financ-
ing was made available, it was argued, physical capital investment and, ulti-
mately, growth would follow.1
This chapter contends that both investment and growth, as well as inno-
vation and technical change, are driven by the prevailing policies and eco-
nomic, social, and legal institutions. While some of these polices, particu-
larly macroeconomic policies, can be measured directly, the effect and
efficiency of other policy areas are much more difficult to assess. By studying
the determinants of private investment, it is possible to study a larger set of
institutional and policy issues that affect firms.
The basic idea in the initial wave of the so-called endogenous growth
theory is that growth differences could be sustained indefinitely because the
return to capital would not diminish as economies develop (Lucas 1988;
Rebelo 1991; Romer 1986). Unlike the growth theory of the 1960s, recent re-
search reflects closer attention to the relationship between theory and data.
Indeed, a large empirical literature developed in the 1990s in which virtually
every possible variable has been used to explain this divergence in growth
over time within the cross-country framework (Barro 1991; see Barro and
Sala-i-Martin 1995 for a review). Most of this work explains cross-country
differences in growth, but a few studies also attempt to explain Africa’s poor
performance (Easterly and Levine 1997; Sachs and Warner 1995, 1996; see
Collier and Gunning 1999 for a review). While the explanatory power of many
of the proposed variables has been shown to depend on specification, sample,
or measurement, some variables appear to be robustly correlated with growth
(see Levine and Renelt 1992 for a critical review). These variables include
investment rate (DeLong and Summers 1991; Mankiw, Romer, and Weil 1992),
level of initial income, human capital stock, openness to trade, financial depth,
and fiscal stance. The African growth “tragedy” has been explained by addi-
tional factors, including high volatility (high incidence of shocks originating
from external terms of trade, climate, or policy), deficient public infrastruc-
ture, and ethnic fragmentation.
1. Recent research based on data for a cross-section of countries during 1970–97

shows that public investment has not been correlated with growth in Africa (Devarajan,
Easterly, and Pack 1999). Similarly, private investment has not been correlated with
growth, unless Botswana is included in the sample. This result is not surprising given
the poor policy and institutional environment in most of these countries during most
of the sample period.
Confronting Competition: Investment, Profit, and Risk 209
This chapter has two objectives. First, using new microeconomic data from
Uganda, it examines the extent to which liberalization and the profound
macroeconomic and structural reforms implemented in the late 1980s and
the 1990s translate into higher private investment. Second, while at present
households are important economic agents in agriculture and other sectors,
sustainability of economic growth depends on the growth of firms, because
households seldom achieve significant economies of scale necessary for sus-
tained growth. Using quantitative and qualitative survey data, the chapter
analyzes factors that constrain investment and the growth of Ugandan firms.
Investment Response
Firm surveys have proven a useful tool to explore private sector responses
to macroeconomic reforms and to increase our understanding of
microeconomic constraints to investment. Such surveys can also help
policymakers prioritize policies and interventions to improve the business
environment. In Africa, the Regional Program on Enterprise Development,
initiated by the World Bank, has over time produced valuable quantitative
data on manufacturing firms for Burundi, Cameroon, Côte d’Ivoire, Ghana,
Kenya, Tanzania, Zambia, and Zimbabwe (Biggs and Srivastava 1996). The
1998 Uganda enterprise survey benefited from the Regional Program on
Enterprise Development model and, hence, is comparable to the other Af-
rican surveys. However, the Uganda survey is somewhat more limited in
its scope (it excludes detailed labor and finance questions), but covers a
wider range of sectors—in addition to manufacturing it includes firms in
commercial agriculture, construction, and tourism (for details, see appen-
dix B at the end of the book). In addition, it includes a wider range of ques-
tions on infrastructure, taxation, and corruption.
Investment Data
Before analyzing the regression results, it is useful to examine the Ugandan
investment data and compare them with similar data for four other African
countries: Cameroon, Ghana, Kenya, and Zimbabwe. The survey provides
quantitative data on employment, capital stock, investment, sales, and value
added for 192 Ugandan firms during 1995–97. Because changes are used in
some of the variables, one year of observations (1995) is lost. Thus, data per-
mitting, each firm has two observations, making the total number of obser-
vations 367. Initial inspection of the data resulted in discarding 14 of these
observations as outliers, leaving a sample size of 353.2
2. Observations with reported value added to capital above 1,000 percent or

below –100 percent are dropped. A closer inspection of the data revealed
thatmisreported or erroneous recording of capital stock data was the source of these
extreme values.
As shown in table A7.1, about half of the Ugandan firms made an invest-
ment in machinery and equipment in both 1996 and 1997. This is similar to
the African country average. For individual countries where comparable in-
formation exists, the percentage of Ugandan firms that invested is somewhat
higher than in Cameroon, Ghana, and Kenya, but lower than in Zimbabwe
(Bigsten and others 1999). While large firms are more likely to invest (77 per-
cent of large and 45 percent of small firms in Uganda), they invest less rela-
tive to their capital stock than smaller firms. For the Ugandan firms that in-
vested, the value of investment relative to the capital stock (investment rate)
was, on average, 11 percent for large firms and 30 percent for small firms. For
all Ugandan firms, both those that did and did not invest, the investment
rate was 13 percent in 1996 and 11 percent for 1997. Again, this pattern is
quite similar to the African comparator country average. With respect to in-
dividual comparator countries, the investment rate for the firms that invested
in Uganda is lower than that in Cameroon and Ghana, about the same as in
Kenya, and higher than in Zimbabwe.
Averages, however, can be misleading when the underlying distribution
is skewed. At the median firm, the Ugandan investment rate is very low: less
than 1 percent for all firms and 4.7 percent for those firms that invest. The
picture is similar in the four comparator countries, that is, median invest-
ment rates for all firms range from zero in Cameroon and Kenya, to less than
1 percent in Ghana, to 3 percent in Zimbabwe.3
As shown in table 7.1, there are obvious differences between firms that
invest and those that do not invest. Investing firms, on average, have higher
profits, tend to experience positive changes in demand and value added, are
larger in terms of value added and employment, and are somewhat more
recently established. Uganda and Ghana are the only countries that experi-
ence a positive change in value added (and gross sales for Uganda) at the
median, reflecting a growing economy and relatively good economic poli-
cies. For Ugandan firms that invest, the sales-to-capital stock ratio increased
by 42 percent, on average (9 percent at the median), while for firms that did
not invest, the change in sales was negative (0 at the median).
Another notable characteristic of African firms is the very high mean and
median profit rates, that is, profit as a share of the installed capital stock is
high. These gross profits are calculated as the firm’s value added less wages
and interest payments. Compared with the rest of the world, the high
profit-to-capital ratios are likely to be driven by the low level of installed
machinery and equipment. For the four comparator countries, Bigsten and
3. The firm survey data seem to be generally consistent with the trend depicted
by Uganda’s macroeconomic data. As shown in chapter 2, private investment was
relatively stable during the survey period of 1995–97, while the overall share of in-
vestment in machinery and equipment in gross domestic product fell somewhat after
the 1994–95 coffee boom.
Table 7.1. Summary Statistics for Ugandan Firms, Pooled Data, 1996–97
Firms that Firms that do

Variable invest not invest All firms
Profit rate 0.914 0.565 0.747
[0.306] [0.177] [0.256]
Change in sales 0.418 –0.023 0.207
[0.090] [0.001] [0.028]
Change in value added 0.214 0.012 0.117
[0.027] [–0.001] [0.007]
Value added 1.39 0.890 1.149
[0.501] [0.330] [0.414]
Size (employment) 150 51 103
[50] [19] [28]
Age (years) 12 14 13
[9] [11] [10]
Investment rate 0.234 n.a. 0.122
[0.047] n.a. [0.002]
Note: Mean values, with median values in brackets. There were 184 observations with positive
investment and 169 with zero investment. Variables are expressed as a ratio of lagged capital
stock, except for size and age.
Source: Authors’ calculations based on the 1998 enterprise survey.
others (1999) report an average profit rate of 198 percent and a median of 40
percent for all firms. While the Ugandan investment rates do not differ much
from the African average, average profit rates are clearly lower. They are also
lower than in any individual comparator country. Indeed, profit rates in
Uganda, both at the median and the mean, are only about half of those re-
ported for the pooled African sample: for those Ugandan firms that invested,
the mean profit rate was 91 percent (31 percent at the median), while for all
firms the mean was 75 percent (26 percent at the median).
Flexible Accelerator Model of Investment

To what extent is investment across Ugandan firms driven by changes in de-
mand as suggested by the flexible accelerator model of investment? Are firms
in general constrained by liquidity? Do age and size matter? Are there any
clear geographical or sectoral differences in investment behavior? To answer
these questions a simple flexible accelerator model is estimated (see annex 7.2).
In this model, fluctuations in demand are assumed to motivate investment.
Given the weaknesses of the financial sector in African economies, a model is
adopted in which firms do not have access to credit and simply allocate cur-
rent profits to investment (for details see Tybout 1983). A similar approach has
been applied to four other African countries, namely, Cameroon, Ghana, Kenya,
and Zimbabwe (Bigsten and others 1999). By replicating their specification,
this section explores whether Uganda, with its better macroeconomic record,
differs from the other countries in terms of firms’ investment response. As in
the case of the comparator countries, data on investment in machinery and
equipment are used.
The flexible accelerator model of investment for a profit maximizing firm
i, which is liquidity constrained, can be written as follows (see annex 7.2 for
details):
(7.1) Ii (t) = αoi + αQ ∆Qi (t) + αππi (t) + αIIi (t – 1) + αx Xi + dt + εi,
where Ii (t) is the level of investment for firm i at time t, αoi is the constant for
firm i, ∆Qi denotes the change in sales, πi is the level of profits, Xi denotes
firm-specific characteristics (age, size), dt is a time dummy, and εi is the error
term. To avoid the heteroskedasticity problem with respect to size in the esti-
mation, the variables are expressed in rates, that is, scaled by the inverse of
capital stock at the end of the previous period, K(t – 1).
The empirical model set out in equation (7.1) treats investment as a con-
tinuous variable. However, capital investment is typically lumpy, which
constrains the firm’s investment behavior. In a given year the firm may not
be able to invest the desired amount and, therefore, chooses not to invest at
all. In other words, the observable data on firms’ investment rates are inci-
dentally truncated and, thus, equation (7.1) is estimated in two stages.4 The
two-stage procedure involves, first, the estimation of a probit model of the
decision to invest and, second, an estimation of the investment rate equa-
tion for the firms that invested, accounting for the selection of firms with
only positive investment.
Regression Results
This section explores how well the flexible accelerator model, as expressed in
equation (7.1), can explain Ugandan firms’ decisions to invest and the amount.
Table 7.2 reports the basic results, including the two-stage estimation and the
Tobit regression. Apart from the variables defined above, each regression in-
cludes industrial category and location-specific dummies. Column 1 shows
the result of the first-stage probit model concerning the decision to invest. At
the 90 percent confidence level, both the accelerator (change in sales) and the
liquidity constraint (profit) are found to be important in the decision to invest.
Thus, according to the prediction of the accelerator model, Ugandan firms in-
deed invest to meet increases in demand, provided that they have sufficient
4. Heckman’s (1979) two-step procedure. If the factors that determine the deci-
sion to invest and the amount of investment are the same, the correct specification is
the Tobit model.
Table 7.2. Investment Regressions for All Ugandan Firms, 1995–97
(2) Ordinary
(1) Probit least squares (3) Tobit
Variable regression regression regression
Constant –1.15a 0.992 –0.430b
(0.470) (0.525) (0.232)
Change in sales-to-capital stock 0.164b –0.055 0.032
(0.073) (0.042) (0.028)
Profit rate 0.090c 0.076b 0.100a
(0.054) (0.035) (0.024)
Age (log) –0.250a –0.028 –0.147a
(0.092) (0.054) (0.045)
Size (log) 0.372a –0.120 0.087a
(0.064) (0.075) (0.030)
Time dummy 0.060 –0.082 –0.005
(0.144) (0.084) (0.072)
District dummies significant No No No
Industrial category dummies significant Yes No Yes
Agroprocessing 0.844a n.a. 0.258c
(0.288) n.a. (0.137)
Tourism 0.644b n.a. 0.281c
(0.320) n.a. (0.158)
Predictability 0.70 n.a. n.a.
R2 n.a. 0.15 n.a.
Observations 353 184 353
Note: The dependent variable in regression (1) takes the value one if the firm invested and
zero otherwise. Standard errors (in parenthesis) adjusted for heteroskedasticity (White 1980).
Regressions (2) and (3) were adjusted for selectivity. (The inverse Mills ratio is not reported.)
a. Significant at the 1 percent level.
b. Significant at the 5 percent level.
c. Significant at the 10 percent level.
funds—that is, adequate profits—to do so. If they do not have adequate prof-
its, they cannot invest, even if the demand for their product is increasing.5
Age and size also enter significantly into the decision to invest. Bigsten
and others (1999) argue that size may proxy the likelihood that indivisibilities
in investment constrain capital accumulation (the constraint is less likely to
bind for large firms), and that older firms are likely to have better access to
bank finance. The Ugandan data support the first of these assumptions (size
is positively correlated with the probability to invest), but rejects the second
5. The results are very similar when using the lagged profit-to-capital ratio in-
stead of the profit-to-lagged-capital ratio.
(age enters significantly, but with a negative sign). A possible explanation for
the latter result is that older firms in the sample were first established in an
environment with a very different incentive system. While many establish-
ments in the 1996 census update began operating during the first half of the
1990s (37 percent), many of the older firms were endowed with a capital
stock that, because of drastic changes in the policy environment, is no longer
viable (for example, equipment to produce an import-substituting good).
These firms are therefore less willing to invest. Two industrial category dum-
mies are also significant. Holding changes in demand and profit constant,
firms in agroprocessing and tourism are more likely to invest.
Column 2 in table 7.2 reports the second-stage regression, which exam-
ines the amount of investment for those firms that invested in machinery
and equipment.6 Now only profit enters significantly. Thus, while demand
changes play a role in determining whether or not to invest, profit is the
only binding constraint for the level of investment. The results suggest that
most (but not all) firms can generate funds for some investment if demand
is increasing, but they cannot realize their desired investment level if cur-
rent profits are not sufficient. Interestingly, neither age nor size nor any of
the sector and location dummies enter significantly. Indivisibilities and sec-
tor-specific factors are important for the decision to invest, but they do not
influence the actual investment level. This interpretation is supported by
the Tobit regression reported in column 3. The profit rate is highly signifi-
cant, but the accelerator is insignificant at the conventionally accepted sig-
nificance levels.7,8
6. The flexible accelerator model was also applied to investment data on build-
ings and land, for which valuation is much more difficult. In the probit model, only
size and some district and industrial category dummies are significant (at the 10 per-
cent level) for the decision to invest, while none of the variables are significant in the
second-stage regression.
7. When using a dynamic specification of the model, that is, including a lagged
dependent variable, all qualitative results continue to hold. The main difference is
that the size of the coefficient on the profit term is reduced from 0.100 to 0.059 in the
Tobit model. Lagged investment is insignificant in all three specifications: decision to
invest, investment level regression, and Tobit model. Given the lack of significance,
and because around a dozen observations are lost by including the lagged dependent
variable, the restricted model (reported in table 7.2) appears preferable.
8. Another potential objection to the reported results could be that they may be
driven by unobservable firm-specific factors. To test this, a second-stage regression
with fixed effects is run, using deviations from means. The results imply a lower, but
highly significant, coefficient on the profit term (0.034 with a t-value of 4.80). How-
ever, a test of the hypothesis that the fixed effects were all equal across firms indi-
cated that the fixed effect specification was not efficient. In other words, the fixed
effects are picking up important cross-firm differences in profits and demand, reduc-
ing the explanatory power of these variables in the regression.
In table A7.2 the sample is partitioned into small firms (100 employees or
less) and large firms (more than 100 employees). The results reveal some
interesting trends. First, for the decision to invest (columns 1 and 3), for small
firms only the profit term is significantly positive, while for large firms the
important explanatory variable is changes in demand. Second, the second-
stage regressions (columns 2 and 4) show a similar pattern for small firms,
while neither profit nor the accelerator is significant for large firms. Third, as
before, only the age of the firm appears significant and negative, for the large
firms.9,10 The results suggest that firms, particularly small ones, are liquidity
constrained in the sense that they cannot invest (or can invest only small
amounts) when demand is increasing if they do not have sufficient funds
available. However, given the reported high profit-to-capital ratio in Uganda
(and in the four comparator countries), it is hard to argue that the liquidity
constraint is binding in most cases.
Comparing the results from the Ugandan firm survey with the evidence
from other African countries is interesting.11 Regarding the decision to in-
vest and using the same model specification, the Ugandan coefficient for
profit is found to be somewhat larger. In the level of investment, the esti-
mated coefficient for profit in Uganda is also larger (0.076 versus 0.03 else-
where). This holds for all firms and when the firms are divided into two
groups according to size. While Bigsten and others (1999) find no robust
correlation between the accelerator and investment in the other African
countries, this study finds some evidence that demand plays a role in in-
vestment for large Ugandan firms. Age and size of the firm behave simi-
larly in Uganda as elsewhere. Compared with the rest of the world, the
estimated coefficient on profit (and accelerator) is small in Uganda, even
though it is larger than in the African comparator countries (see, for ex-
ample, Athey and Laumas 1994; Bigsten and others 1999; Bond and others
1997; Tybout 1983).
9. The lack of clear results for large firms in the second-stage regression may be
driven by the small sample size. By estimating a Tobit regression, degrees of freedom
can be saved.
10. While in both the 1994 and 1998 firm surveys interest rates were ranked as
one of the leading constraints by firms of all sizes, firms’ perceptions varied con-
siderably regarding access to finance. As in the quantitative analysis, the percep-
tions of larger enterprises seem to be different from those of smaller ones. For large
enterprises that had not borrowed money recently, the leading reason after “high
interest rates” was “no need to borrow.” Nor did collateral requirements prevent
large firms from borrowing; the smaller the firm, the more collateral proved a prob-
lem. Liquidity constraints may be binding for start-ups, however. Firms reported
that about 70 percent of their private investment was financed by profits and per-
sonal savings.
11. As Bigsten and others (1999) do not report marginal effects, the results are
compared at each stage.
Constraints to Investment
So far this chapter has examined the determinants of private investment by

different types of firms in the single country context. In general, the Ugan-
dan results are strikingly similar to those obtained from several other Afri-
can countries. This section takes the viewpoint of a typical, or average, Ugan-
dan firm and examines differences across countries. In particular, it attempts
to explain the observation that firms’ profit rates are lower in Uganda, while
investment rates are similar.
Profit Rates
Table 7.3 reports a series of regressions of profit rates on size and foreign
ownership, using data from both the Ugandan firm survey and the four
other surveys described in Bigsten and others (1999). Column 1 illustrates
Table 7.3. Profit Rate Regressions, Pooled Data for Cameroon, Ghana,
Kenya, Zimbabwe, and Uganda
(1) Profit (2) Profit (3) Profit (4) Profit (5) Profit
Variable rate rate rate rate rate
Constant 3.46a 3.99a 3.41a 2.02a 1.81a
(0.444) (0.510) (0.631) (0.172) (0.221)
Foreign 0.933c 0.801c 0.856c –0.014 –0.007
(0.493) (0.480) (0.481) (0.105) (0.105)
Size (log) –0.631a –0.623a –0.523a –0.267a –0.238a
(0.128) (0.109) (0.104) (0.035) (0.037)
Uganda n.a. –1.23a –1.03a –0.559a –0.447a
n.a. (0.194) (0.373) (0.090) (0.152)
Cameroon n.a. n.a. –0.557 n.a. –0.005
n.a. n.a. (0.476) n.a. (0.211)
Zimbabwe n.a. n.a. –0.345 n.a. –0.018
n.a. n.a. (0.363) n.a. (0.151)
Ghana n.a. n.a. 1.51a n.a. 0.452b
n.a. n.a. (0.691) n.a. (0.212)
R2 0.05 0.07 0.09 0.09 0.10
Observations 1,287 1,287 1,287 1,058 1,058
Note: The dependent variable is the profit rate (profit-to-capital ratio); foreign is a binary
variable taking the value one if the firm is foreign owned, zero otherwise. Standard errors (in
parenthesis) adjusted for heteroskedasticity (White 1980). Regressions (4) and (5) exclude outliers.
Source: Authors’ calculations based on the 1998 enterprise survey; Bigsten and others (1999).
the result when pooling all variables (altogether, 1,287 observations). As

evident from the table, the size of the firm (logarithm of total employment)
is significantly negatively correlated with the profit rate (profit-to-capital
ratio). Foreign ownership is positively related to profit (although the dummy
variable enters only marginally significant at the 10 percent level). In col-
umn 2 a dummy for Ugandan firms is added. The dummy enters with a
large, negative coefficient and is highly significant. Thus, controlling for
size and ownership, Ugandan firms, on average, have significantly lower
profits than firms in the four comparator countries.
Significant differences are apparent across the four comparator countries.
When adding (individually) country controls for the four comparators (col-
umn 1), the country dummies for Cameroon, Kenya, and Zimbabwe differ
insignificantly from zero, while the Ghana dummy is significantly positive.
As reported in column 3, the result is similar if all country controls are in-
cluded (one has to be dropped to estimate the regression). The Uganda
dummy is significantly negative, while the Cameroon and Zimbabwe (and
Kenya if we replace Zimbabwe with Kenya) controls are insignificant, and
Ghana is significantly positive.
There are at least two possible objections to the pooled results in col-
umns 1–3. First, while the Uganda sample includes both manufacturing
firms and firms in commercial agriculture, tourism, and construction, the
sample of firms in the comparator countries only includes manufacturing
firms, including agroprocessing firms. To control for this possibility, all
Ugandan firms in commercial agriculture, tourism, and construction are
excluded. Second, in the Uganda sample a few firms with extreme value
added were excluded, while the sample of firms of the comparator coun-
tries include a few firms with extreme profit rates (and value added) of
more than 1,000 (up to almost 8,000) percent. While these observations may
not necessarily be misreported, it would be of concern if the results were
driven by them. To examine this possibility, all observations with profit
rates larger than 1,000 percent and lower than –100 percent were dropped.
The new results are depicted in columns 4 and 5.
As evident, the results are very similar qualitatively to those reported
earlier. The Uganda dummy remains negative and highly significant, but
with a smaller coefficient (in absolute terms). On average, controlling for size
and ownership, the Ugandan firms’ profit rate is 56 percentage points lower
than in other African countries. Again, some differences exist across the four
comparators. Repeating the procedure described, the country dummies for
Cameroon, Kenya, and Zimbabwe again differ insignificantly from zero, while
the Ghana dummy is significantly positive. As shown in column 5, including
all country controls simultaneously yields a similar result. The Uganda
dummy is significantly negative, while the Cameroon and Kenya (and Zim-
babwe if we replace Kenya with Zimbabwe) controls are insignificant and
Ghana is significantly positive. Finally, the coefficient on size is now only
one-third of that reported in column 1, suggesting that a few extreme obser-

vations significantly affect the absolute value of the coefficient.12
Conceptual Framework
How can Ugandan investment rates be similar to those in other African coun-
tries when Uganda’s profit rates are lower? This section constructs a simple
conceptual framework suggesting one possible answer.
Consider a two-period model of a representative firm. A risk-neutral
manager decides on the firm’s level of investment in period one to maximize
the present value of its cash flow c1 + βc2, where β = 1/(1 + θ) is the discount
factor. One can think of θ as capturing expectations about the future. The
assumption is that the firm can borrow in period one. The interest on the
borrowed amount b is r. To avoid extreme solutions, we assume that r ≥ θ,
implying that the firm will only borrow to finance investment. The budget
constraint in period one is then:
(7.2) c1 + i ≤ π1 + b,
where π1 is the initial profit available to the firm and i is the level of invest-
ment. The return to investment (or gross profit) is captured by the concave
and strictly positive revenue function π2(i:x), where x is a vector of variables
that affect the profit but which the firm cannot control (degree of competi-
tion, quality of infrastructure, and so on). The budget constraint in period
two can be expressed as follows:
(7.3) c2 = π2(i:x) – (1 + r)b.
The model is easily solved by maximizing the firm’s cash flow subject to
the budget constraints. Provided that the firm has sufficient internal funds, it
will not borrow. Then the first-order condition that defines the optimal level
of investment i* can be written as follows:13
(7.4) π’2(i*) – (1 + θ) = 0.
The first term in equation (7.4) is the marginal return (MR) curve. The
second term is the discounted opportunity cost. The equilibrium is illustrated
in the middle graph in figure 7.1.
This simple model has a number of interesting implications. First, a policy
change that, other things being equal, reduces profits (for example, increased
competition from abroad resulting from trade liberalization) shifts the MR curve
12. Indeed, when dropping all firms with profit rates larger than 300 percent, no
significant statistical relationship exists between size and profit. The relationship be-
tween profit rates and size for Ugandan manufacturing firms is also significantly
negative (coefficient = 0.17).
13. If the firm does not have sufficient internal funds, that is, βπ’2(π1) – 1 > 0, it will
borrow. The first order condition then becomes π’2(π1 + b) – (1 + r) = 0.
Figure 7.1. Investment and Profit in Uganda and Other African

Countries
Profit
πOth (i;x)
πUga (i;x)
i0 Investment
Marginal return
(1 + θ)Oth
(1 + θ)Uga
MROth
MRUga
i0 Investment
Profit rate
π/KOth
π/KUga
π/KOth
π/KUga
i0 Investment
MR Marginal return.
θ Discount rate.
i Level of investment.
Source: Authors.
inward, leading to a lower level of investment for a given r and θ for the exist-
ing firms.14 Second, a lower discount rate θ (for example, better economic po-
lices are expected in the future) would shift the horizontal curve down, lead-
ing to a higher investment level as future income becomes more valuable.
Comparing Uganda with other African countries, the model offers one
potential explanation as to how investment rates can be similar while profit
rates are lower. Increased competition has reduced profits and would, every-
thing else being equal, have reduced investment rates as well. However, less
uncertainty about future policies, resulting in a lower θ, counterbalances the
negative effect of tougher competition on the level of capital accumulation.
In equilibrium (figure 7.1), investment remains the same while profits and
profit rates are lower.
While it would be interesting to test this simple model statistically using
the Ugandan survey data, endogeneity problems and a lack of suitable in-
struments effectively prevent this. Instead, the conceptual framework can be
used for a diagnostic discussion of the factors that are likely to affect the MR
curve and the discount rate (θ) of an average Ugandan firm. The analysis
poses two hypothetical questions: Why is the Ugandan MR curve likely to be
to the left of that of other African countries? Why is the discount rate of Ugan-
dan firms likely to be smaller than elsewhere in Africa? The diagnostics are
based on both quantitative and qualitative survey data from Uganda and
focus on firms’ perceptions of constraints to investment, competitive envi-
ronment, costs beyond firms’ control (infrastructure, corruption), risk, and
policy credibility. Note, however, that similar data are not available for the
comparator countries. Hence, the diagnostics presented in the rest of the chap-
ter are tentative at best.
Firms’ Perceptions of Constraints

This section examines qualitative data on constraints to investment.
Rankings of constraints reported by firms give us a general idea of likely
factors affecting both the marginal return to investment and the discount
rate. In the 1998 survey Ugandan enterprises identified price and quality of
utility services (electricity, telephones, water, and so on), high taxes, and
interest rates as “major” (four on a scale of one to five) constraints to in-
vestment (figure 7.2). Corruption, access to finance, tax administration, and
the cost of raw materials formed a second tier of leading constraints. Fi-
nally, the group of “moderate” (three on a scale of one to five) constraints
included the problems of local competition, lack of demand, lack of busi-
ness support services, crime and security, lack of skilled labor, and uncer-
tainty about government policies. The largest variance in responses between
firms occurred in access to finance and raw materials.
14. In this context we disregard the fact that increased competition may have
other effects, such as raising productivity, which would shift the MR curve outward.
Figure 7.2. Ranking of Constraints to Investment, 1998
High utility prices
High taxes
Poor utility services
Interest rates
Corruption
Tax administration
Access to finance
Crime and security

Uncertainty about
government policies
Lack of skilled labor
Exchange rate
Cost of raw materials
and supplies
Insufficient demand
Inflation
Lack of business
support services
Government's debt
burden
Competition from local
firms
Other regulations
Import and export
regulations
Competition from
imports
Access to raw materials
and supplies
Access to land
Unclear property rights
Politicial instability
1 2 3 4 5
No Minor Moderate Major Severe
obstacle obstacle obstacle obstacle obstacle

A similar survey carried out in 1994 provides an interesting dynamic com-

parison (figure 7.3).15 In the earlier survey, only high taxes were ranked a
“major” constraint, while together with availability of inputs, lack of demand,
and economic policy uncertainty, cost and access to finance and infrastruc-
ture formed a second tier of “moderate” constraints. In that survey infra-
structure included both the quality and the price of utility services. In addi-
tion to a general elevation of constraints in their perceived severity, the major
differences between 1994 and 1998 are the top rating of utility prices when
offered in the 1998 survey as a separate constraint choice; the identification
Figure 7.3. Ranking of Constraints to Future Operations and Growth in

1994
High taxes
Cost of finance
Access to finance
Infrastructure
Availability of inputs
Demand
Economic policy
uncertainty
Other regulation
Inflation
Policy uncertainty
Labor force
Business support
services
Trade regulation
Exchange rate level
fluctuations
1 2 3 4 5
obstacle obstacle obstacle obstacle obstacle
Source: World Bank (1994).
15. The 1994 survey differed slightly in its formulation of constraints, offered fewer
choices of constraints to rank, and included firms from more subsectors of the economy.
of corruption as a leading constraint when offered in the 1998 survey, the

recognition of labor force skills as a moderate constraint, and the new evalu-
ation of the lack of business services as a moderate constraint.
A closer look at the constraints by firm category shows little difference
between the relative rankings in 1998 by small and large firms. For large
firms, however, constraints were generally more binding, as reflected in higher
perception scores. For foreign firms (and construction industry firms), cor-
ruption was the second constraint in severity (see figure A10.1 in chapter 10).
For Kampala-based firms, access to utility services was less binding than for
other locations, while commercial farms and construction companies were
less concerned about high taxes than the other firms.
Competitive Environment
When asked whether competition for their principal product had changed
during the past three years, 88 percent of firms said it had increased, 10
percent reported unchanged competition, and only 2 percent said it had
decreased. Similarly, the number of new firms exceeded those that had ex-
ited. The firm-level evidence of increased competition accords with the lib-
eralization of the economy and the continued start-up of new firms. Fair-
ness constitutes another feature of competition. In 1994 a perception of
unfairness existed in tax and regulatory administration. In 1998 this per-
ception remained, with tax evasion as a leading constraint in relation to
unfair competition. Firms in commercial agriculture reported the lowest
incidence of unfair competition. However, the numerical constraint scores
for competitors evading taxes, undercutting fair prices, or smuggling have
all declined. Hence, while the overall level of competition has increased,
firms’ perception is that it has become slightly fairer since 1994.
Lower profits are thus consistent with the observation of increased com-
petition and the pressure it places on firms to reduce costs. Many of the re-
ported cost constraints, such as utility prices, cost of imported inputs, and
interest rates, are outside firms’ direct control. One can therefore infer from
the perception data that increased competition may not have been matched
by corresponding improvements in physical and other support systems, par-
ticularly those in the public domain. This makes it difficult for firms to re-
spond to the challenge of increased competition brought about by external
liberalization by cutting costs.
Costs beyond Firms’ Control

As noted earlier, the Ugandan firm survey of 1998 points to at least three
categories of costs that are beyond the firm’s control, but that nonetheless
tend to lower their profits. First, transport and other import-related costs
add about 50 percent, on average, to the cost of imported capital goods and
inputs compared with their cost in the country of origin. Second, infrastruc-
ture services are highly deficient and costly, which also affects profits and
tends to shift the MR curve to the left. The 1998 survey confirmed that the
cost of utilities is the most binding constraint to all types of Ugandan firms.
Reliability and adequacy of electric power supply remain the leading infra-
structure constraints to Ugandan enterprises, the only “major” constraints in
the evaluation of respondents. Responses suggest that the electric power sup-
ply has worsened in the last few years as demand has increased. Given the
poor quality of infrastructure services, investment in productive capacity often
requires an additional investment in complementary capital by the firm, such
as electric power generators (see Reinikka and Svensson 1999). Third, cor-
ruption is another factor that adversely affects returns to investment and,
hence, shifts the MR curve inwards. As Svensson notes in chapter 10, the
Ugandan survey data show that the larger, more profitable, more export-
oriented the firm, the higher the incidence and the amount of bribe payments.
Risk
The relatively high profit rates in African firms point to a high cost of capital
and high risk. The latter affects the discount rate θ and tends to shift the
horizontal line in figure 7.1 upward. The Ugandan firm survey reveals at
least three types of risks that can adversely affect firms’ expectations of fu-
ture returns. First, erratic transport and other infrastructure services create a
high risk in terms of unexpected delays (and related extra costs) in produc-
tion, imports, and exports. For example, in 1998 it took an average of 30 days
for imported inputs to arrive from their original destination in the port (typi-
cally, Mombasa), another 30 days from the port to Ugandan customs, and an
extra 9 days to the firm. While these figures are ex post averages, there is
considerable variance among firms. In electric power supply, firms report
that 87 operating days are lost annually due to power cuts. Although vari-
ance between firms is smaller with respect to power shortages than other
infrastructure services, blackouts and brown-outs create uncertainty about
the returns to investment projects, including uncertainty about future im-
provement in these services (Reinikka and Svensson 1999).
Second, while the past decade has shown improvement, the tax administra-
tion is still plagued by arbitrary tax assessments and audits. When firms do not
know their tax liability in advance, returns to investment become uncertain.
Crime poses a third major risk for Ugandan firms. The survey shows that
54 percent of the firms experienced merchandise robbery or theft of goods and
equipment in 1995–97. Thirty-seven percent of the firms had also been victims
of fraud. The loss from all these incidents was equivalent to US$7,500 at the
median firm during the three years. Compared with corruption, for example,
the incidence of crime seems to be relatively random. There is no evidence that
the incidence of robbery or fraud, or the size of the loss from them, are corre-
lated with profit, sales, or other cost- and revenue-related data from the firms.
No evidence supports that certain sectors, foreign-owned firms, or those en-
gaged in trade more often experience crime. The only characteristic of firms
that seems to matter is size (proxied by employment) and location. Larger firms
are more often exposed to crime, and Kampala firms encounter an approxi-
mate 20 percent increase in the probability of robbery or theft, independent of
the size of the firm. In the sample, the probability that the average [median]
firm in Kampala with 120 [35] employees had suffered from robbery and/or
theft during the past three years is around 70 [63] percent. Not surprisingly,
larger firms and firms located in Kampala spend significantly more on secu-
rity. The annual cost of security for the median firm is equivalent to US$1,800,
which equals the median firms’ reported corruption payment per year. The
data reveal that a 1 percent increase in employment (that is, firm size) corre-
sponds with a 1.5 percent increase in security spending.
Finally, noncommercial risk (captured by “political instability” in the over-
all ranking of constraints) does not seem to concern many firms already in
operation. According to a foreign investor survey, however, these risks were
more of a concern for potential investors (World Bank 1999).
Policy Credibility
At the time of the firm survey in 1998, the private sector in Uganda seemed
fairly confident that good macroeconomic management would continue both
in the short and medium term, that is, one and three years from the time of
the interview. This optimism was spread across all five sectors. On average,
firms expected the exchange rate to remain about the same for the short term
as at the time when the survey was carried out. Foreign-owned firms antici-
pated a slightly higher depreciation, however. In the medium term a slight
depreciation was expected (less than 10 percent). These results indicate that
firms did not expect any major exchange rate volatility either in the short or
medium term. Subsequent depreciation has been more substantial than the
firms’ expectations in 1998. Inflation forecasts were also relatively favorable.
More than half of the firms expected that the country’s single-digit average
annual inflation—which had been maintained consistently since 1992/93—
would continue both in the short and medium term.
Two-thirds of the enterprises expected the trade regime to be further lib-
eralized, and almost all firms expected the privatization program to continue.
Indeed, at the time of the survey privatization appeared to be the most cred-
ible of all the government’s economic reforms. As discussed in chapter 2,
while a large number of productive enterprises have been privatized in re-
cent years, privatization of a few high-profile enterprises subsequently failed
and corruption investigations were initiated. As a result, the privatization
program was partially halted in 1998/99.
Firms were less optimistic about the financial sector reform and its impact
on future interest rates. About half the respondents expected interest rates to
be lower in three years’ time. However, close to 40 percent of firms did not
believe that the banking sector could be reformed in the medium term and
expected even higher interest rates. Concerning access to bank financing, four
out of every five respondents expected the situation to remain the same or to
improve. In 1999 the Ugandan financial sector saw a number of bank closures,
so firms might have appeared even more pessimistic about the financial sector
had the survey been conducted in 1999. While this may be a temporary set-
back and even a sign of more effective banking supervision, it is likely to have
a negative effect on investor confidence, at least in the short term.
Firms seemed to believe in continued growth in 1998: more than two-
thirds of firms anticipated that their production would increase during the
next three years. However, regarding expected future tax rates, they showed
some pessimism: more than half anticipated that tax rates would be increased,
and only 25 percent believed that rates would decrease.16
Conclusions and Policy Recommendations

This chapter shows that investment rates in Uganda are relatively similar
to those in other African countries. On average, the investment rate is slightly
more than 10 percent, while at the median firm it is only about 1 percent.
Such low investment rates in response to economic reform pose a serious
policy problem. Unlike other African comparators, most firms in Uganda
(and Ghana) experienced a positive change in their value added and gross
sales. Investment by small firms seemed to be partly constrained by liquid-
ity, while large firms, on average, could have chosen to invest more from
retained earnings. As shown elsewhere, poor electricity supply substan-
tially hinders private investment (Reinikka and Svensson 1999). Further-
more, Ugandan profits are considerably lower than profit rates elsewhere
in Africa.
These results are consistent with the view that during the latter half of the
1990s, Ugandan firms displayed more confidence in the economy than their
counterparts in many other African countries. Thus, for a given profit rate
Ugandan firms invest more. At the same time increased competition, due to
far-reaching economic liberalization, has pressured firms to cut costs. Many
of the costs, such as utility prices, transport costs, and interest rates, are not
in the firms’ control, however. As there has been no matching improvement
in infrastructure services or the financial sector, firms have failed to fully
meet the challenge of increased competition. Thus, profits have been squeezed.
16. When asked an open-ended question about the best investment opportunity
in the Ugandan economy in the medium term, firms listed a large variety of eco-
nomic activities. Agriculture (horticulture, fruit, flowers, fishing, cattle, and so on)
and agroprocessing were the most popular choices. Tourism and manufacturing (the
latter mainly for the local market) were also frequently mentioned as good opportu-
nities. A few firms considered trading (rather than production) as the most profitable
activity, but the share of these firms was relatively small in the total survey.
The survey identified a number of cost factors to explain the observed

low level of investment in Africa in general and the lower profits in Uganda
in particular. First, capital goods are more expensive, largely due to higher
transport costs and inefficiencies in transit transport and ports. Second, apart
from investing in productive assets, firms often need to purchase comple-
mentary capital, such as power generators, to stay in operation. Third, cor-
ruption is a problem for most firms, particularly for those that invest more
and employ more workers, are active in the formal sector, and are trade ori-
ented. Risk factors likely to increase the discount factor firms apply to the
future cash flow from investment and make longer-term investment less at-
tractive include erratic infrastructure services, arbitrary tax administration,
and crime. At the same time, macroeconomic policy credibility and investor
confidence improved considerably in Uganda in the 1990s, and the risk of
economic policy reversal is perceived to be relatively small. This in turn re-
duces the discount factor of firms.
The survey findings suggest four key policy priorities. First, the electric
power sector urgently needs an effective reform program, combined with
privatization and new investment in large-scale hydropower capacity. This
is key to growth of the firm sector. Without a major improvement in the power
supply, the sustainability of current growth rates is uncertain. Other utilities
also need to improve their services. Second, while the government has com-
mitted in its most recent budgets not to raise tax rates, tax administration
needs improvement. One way could be to initiate a trust-building effort
through establishment of a systematic mechanism of consultation between
the tax collector and taxpayers, as well as proper appeals procedures. Third,
a concerted effort to reduce corruption and improve contract enforcement is
required. Such efforts are likely to take time, and it is initially important to
choose measures that have a strong signaling effect. A recent household sur-
vey found that the judiciary and police are one of the most corrupt institu-
tions (Republic of Uganda 1998). Tackling corruption in these institutions, as
well as in tax administration, should lead to less crime and reduced security
costs, both of which are now a serious problem for firms. Finally, a more
efficient transport route to the coast is needed, both in terms of improving
the infrastructure and reducing red tape. The international donor commu-
nity in Uganda could play a role in this effort, as Uganda alone will likely
find it difficult to effect major changes in transit transport when part of the
problem lies with the neighboring countries.
Annex 7.1. Data and Estimation Results
Table A7.1. Investment in Machinery and Equipment by African Firms

(mean)
Country and Proportion of Investment-capital Investment-capital

category firms investing stock for all firms stock if firms invest
Cameroon
1993–94 0.125 0.059 0.479
1994–95 0.347 0.132 0.382
Ghana
1992 0.363 0.090 0.428
1993 0.536 0.136 0.254
Kenya
1993 0.357 0.072 0.202
1994 0.459 0.127 0.277
Uganda
1996 0.506 0.134 0.263
1997 0.529 0.111 0.208
Large firms 0.765 0.083 0.109
Small firms 0.445 0.133 0.300
Zimbabwe
1993 0.621 0.069 0.111
1994 0.738 0.142 0.193
Comparator average
All firms 0.535 0.128 0.239
Large firms 0.738 0.113 0.152
Small firms 0.458 0.134 0.291
Note: Large firms have more than 100 employees, while small firms have 100 or less employees.
Source: Bigsten and others (1999); authors’ calculations based on the 1998 enterprise survey.
Table A7.2. Investment Regressions for Small and Large Ugandan Firms
(2) Ordinary (4) Ordinary

(1) Probit least squares (3) Probit least squares (5) Tobit (6) Tobit
Variable (small firms) (small firms) (large firms) (large firms) (small firms) (large firms)
Constant 1.14b –0.005 4.95b 0.468c –0.727 0.169
(0.582) (0.216) (2.33) (0.227) (0.365) (0.219)
Change in sales-to-capital stock 0.102 0.040 0.94a 0.006 0.010 0.048c
(0.076) (0.038) (0.342) (0.026) (0.036) (0.028)
Profit rate 0.143b 0.109a –0.12 0.036 0.145a 0.011
(0.065) (0.051) (0.139) (0.026) (0.034) (0.017)
Age (log) –0.306a n.a. –0.062 –0.065a –0.193a –0.064b
(0.104) n.a. (0.333) (0.031) (0.064) (0.028)
Size (log) 0.395a n.a. –0.828b n.a. 0.154b 0.014
229
(0.105) n.a. (0.399) n.a. (0.064) (0.036)
Time dummy 0.019 –0.098 0.524 0.026 –0.042 0.066
(0.160) (0.111) (0.411) (0.049) (0.099) (0.046)
District dummies significant No Yes No No No Yes
Mbale n.a. n.a. n.a. n.a. n.a. –0.305b
n.a. n.a. n.a. n.a. n.a. (0.141)
Kampala n.a. 0.218c n.a. n.a. n.a. n.a.
n.a. (0.114) n.a. n.a. n.a. n.a.
Mukono n.a. 0.389c n.a. n.a. n.a. n.a.
n.a. (0.232) n.a. n.a. n.a. n.a.
Industrial category dummies
significant Yes No Yes No No No
Agroprocessing 0.708b n.a. 2.06b n.a. n.a. n.a.
(0.350) n.a. (0.814) n.a. n.a. n.a.

(2) Ordinary (4) Ordinary

(1) Probit least squares (3) Probit least squares (5) Tobit (6) Tobit
Variable (small firms) (small firms) (large firms) (large firms) (small firms) (large firms)
Predictability 0.67 n.a. 0.80 n.a. n.a. n.a.
R2 n.a. 0.16 n.a. 0.27 n.a. n.a.
230
Observations 278 126 75 58 278 75

Note: The dependent variable in regression (1) takes the value one if the firm invested and zero otherwise. Standard errors (in parenthesis) are adjusted for
heteroskedasticity (White 1980). Regressions (2), (4), (5), and (6) are adjusted for selectivity. The inverse Mills ratio is not reported. The tourism dummy had
to be dropped from regression 3 because all large firms in this sector invested.
Annex 7.2. Derivation of the Investment Equation

Let the cost of instantaneous net investment be given by C(I), where I is net
investment and C is a cost function with C(0) = 0, and C′, C″0 for all I > 0. Let
profit be a concave function of the capital stock π = π(t, K), and assume that
the firm takes product and factor prices as given. As shown by Tybout (1983),
with constant relative prices, investment can be expressed as
(A2.1) I(t) = β[K* – K(t)],
where K* is the desired capital stock implicitly determined by π′(K*) = rC′(0),
and β is a composite variable (constant) of the discount rate, r, and π″ and C″
evaluated at K* and 0, respectively. Hence, in the flexible accelerator model,
investment is driven by the gap between the desired and actual capital stock,
where the relative sluggishness of adjustment depends on the user cost of
capital. Assume that managers expect that the future demand for their out-
put will be Q*, and let K*(t) = γQ*(t), where γ is determined by relative prices.
In discrete time, equation (A2.1) can be written as
(A2.2) I(t) = β[γQ*(t) – K(t – 1)].
Demand expectations are assumed to be linear functions of current output. Thus,
(A2.3) I(t) = β[γφQ(t) – K(t – 1)].
By first-differencing equation (A2.3) and noting that I(t – 1) = K(t – 1) –
K(t – 2), equation (A2.3) can be written as
(A2.4) I(t) = αQ∆Q(t) + (1 – β)I(t – 1),
where αQ ≡ βγφ and ∆Q(t) = Q(t) – Q(t – 1). This is the traditional flexible
accelerator model in which fluctuations in sales motivate changes in capital
spending, that is, investment is driven by demand.
As shown in Tybout (1983), if firms must finance all investment out of
profits and retained earnings, the firms will behave according to (A2.4) when
they have funds to do so. However, with currently binding shortages, they
will simply allocate current profits to investment. Hence,
(A2.5) I(t) = C–1[π(t)].
A general empirical model can now be formed by nesting (A2.4) and (A2.5),
(A2.6) Ii(t) = αi0 + αQ∆Qi(t) + αππi(t) + αIIi(t – 1) + αX′Xi + dt + εi,
where αi0 is a constant for firm i, αX is a n × 1 vector of coefficients, Xi is a
n × 1 vector of firm specific controls (firm age and size), dt is a time dummy,
and εi is an iid error term. To avoid heteroskedasticity problem with respect
to size, I(t), ∆Qi(t) and πi(t) are scaled by the inverse of the end of the previ-
ous period capital stock, K(t – 1). Thus, we are regressing investment rate,
Ii(t)/Ki(t – 1), on change in output (value added) rate, ∆Qi(t)/Ki(t – 1) and
profit rate, πi(t)/Ki(t – 1).
A number of variations of (A2.6) are estimated: with fixed effects (αi0), with
a common constant (α0), and with and without the lagged investment vari-
able. Given the short panel, there are clear costs of estimating the more com-
plex regressions. With fixed effects all firms that do not have observations for
all three years are lost.17 Similarly, including a lagged dependent variable im-
plies that we lose observations for firms that started up after 1995, and fixed
effects in a dynamic model with a short time dimension result in biased esti-
mates (Nickell 1981) that cannot be overcome by instrument variables tech-
niques (due to the short panel) as suggested by Arellano and Bond (1991).
References
Arellano, Manuel, and Stephen Bond. 1991. “Some Tests of Specification for
Panel Data: Monte Carlo Evidence and an Application to Employment
Equations.” Review of Economic Studies 58(April): 277–97.
Athey, M. J., and P. S. Laumas. 1994. “Internal Funds and Corporate Invest-
ment in India.” Journal of Development Economics 45(2): 287–303.
Barro, Robert. 1991. “Economic Growth in a Cross-Section of Countries.”
Quarterly Journal of Economics 106(2): 407–43.
Barro, Robert, and X. Sala-i-Martin. 1995. Economic Growth. New York:
McGraw-Hill.
Biggs, Tyler, and Pradeep Srivastava. 1996. “Structural Aspects of Manufac-
turing in Sub-Saharan Africa: Findings from a Seven Country Enter-
prise Survey.” World Bank Discussion Paper no. 346, Africa Technical
Department Series. World Bank, Washington, D.C.
Bigsten, Arne, Paul Collier, Stefan Dercon, Bernard Gauthier, Jan Willem
Gunning, Anders Isaksson, Abena Oduro, Remco Oostendorp, Cathy
Pattilo, Mans Soderbom, Michel Sylvain, Francis Teal, and Albert
Zeufack. 1999. “Investment in Africa’s Manufacturing Sector: A Four-
Country Panel Data Analysis.” Oxford Bulletin of Economics and Statis-
tics 61(4): 489–512.
Bond, Stephen, Julie Ann Elston, Jacques Mairesse, and Benoit Mulkay. 1997.
“Financial Factors and Investment in Belgium, France, Germany, and the
UK: A Comparison Using Company Panel Data.” Working Paper no. 5900.
National Bureau of Economic Research, Cambridge, Massachusetts.
17. Note that to create a panel with, at the most, two observations for each firm,
we must use data for three years since ∆Q(t) = Q(t) – Q(t – 1).
Collier, Paul, and Jan Willem Gunning. 1999. “Explaining African Economic
Performance.” Journal of Economic Literature 37(March): 64–111.
DeLong, J. B., and L. H. Summers. 1991. “Equipment Investment and Eco-
nomic Growth.” Quarterly Journal of Economics 106(2): 445–502.
Devarajan, Shantayanan, William Easterly, and Howard Pack. 1999. “Is In-
vestment in Africa Too Low or Too High?” World Bank, Development
Research Group, Washington, D.C. Processed.
Easterly, William. 1997. “The Ghost of Financing Gap—How the Harrod-
Domar Growth Model Still Haunts Development Economics.” Policy
Easterly, William, and Ross Levine. 1997. “Africa’s Growth Tragedy: Policies
and Ethnic Division.” Quarterly Journal of Economics 112 (4): 1203–50.
Heckman, James. 1979. “Sample Selection Bias as a Specification Error.”
Levine, Ross, and David Renelt. 1992. “A Sensitivity Analysis of Cross-
Country Growth Regressions.” American Economic Review 82(4): 942–63.
Lucas, R. E. 1988. “On the Mechanism of Economic Development.” Journal of
Monetary Economics 22(1): 3–42.
Mankiw, N. G., D. Romer, and D. N. Weil. 1992. “A Contribution to the
Empirics of Economic Growth.” Quarterly Journal of Economics 107(2):
407–38.
Nickell, Steven J. 1981. “Biases in Dynamic Models with Fixed Effects.”
Rebelo, Sergio 1991. “Long-Run Policy Analysis and Long-Run Growth.” Jour-
nal of Political Economy 99(3): 500–21.
Reinikka, Ritva, and Jakob Svensson. 1999. “How Inadequate Provision of
Public Infrastructure and Services Affects Private Investment.” Policy
Republic of Uganda. 1998. National Integrity Survey. Kampala: Inspector Gen-
eral of Government.
Romer, P. M. 1986. “Increasing Returns and Long-Run Growth.” Journal of
Political Economy 94(5): 1002–37.
Sachs, J. D., and A. M. Warner. 1995. “Natural Resource Abundance and Eco-
nomic Growth.” Working Paper no. 5298. National Bureau of Economic
Research, Cambridge, Massachusetts.
_____. 1996. “Sources of Slow Growth in African Economies.” HIID Devel-

opment Discussion Paper no. 545. Harvard Institute for International
Development, Cambridge, Massachusetts.
Tybout, J. R. 1983. “Credit Rationing and Investment Behavior in a Develop-
ing Country.” Review of Economics and Statistics 65(4): 598–607.
White, Halbert. 1980. “A Heteroscedasticity-Consistent Covariance Matrix
Estimator and a Direct Test for Heteroskedasticity.” Econometrica 48(4):
817–38.
World Bank. 1994. “The Private Sector in Uganda: Results of the World Bank
Enterprise Survey.” World Bank, Eastern Africa Department, Wash-
ington, D.C. Processed.
_____. 1999. “Survey of Foreign Investors.” A Report by the Consorzio Italiano
Consulenti, Bologna, Italy. Processed.
8
Productivity and Exports

Bernard Gauthier
Uganda has liberalized its trade and exchange rate regimes to scale back trade
barriers and price distortions (see chapters 2 and 3 in this volume). Have the
reforms generated a significant response from firms and substantial produc-
tivity gains? Have they encouraged the development of an outward-oriented
industrial sector? While external competition is perceived as favoring effi-
ciency through increased productivity and a shift of resources from ineffi-
cient to efficient sectors, the transition from a restrictive to an open trade
regime can impose short-term adjustment costs in sectors newly exposed to
external competition. The answers to these questions are important, there-
fore, in understanding what can be done to speed and smooth the transition
toward an efficient, outward-oriented industrial base.
To address these issues we examine the impact of trade and exchange
rate reforms on private enterprises. Firm-level productivity and technical
efficiency measures, as well as other performance indicators, are constructed
using detailed information collected in a 1998 survey of firms by the World
Bank and the Ugandan Private Sector Foundation (see appendix B at the end
of the book). Performance measures show whether firms have shifted re-
sources by increasing or decreasing output following the change in incen-
tives; whether they have become more productive in terms of labor produc-
tivity, total unit cost, total factor productivity (TFP), and technical efficiency
(using stochastic production frontier models); whether market shares have
The author thanks Ritva Reinikka for insightful discussions. Excellent research
assistance was provided by Jean Habarurema, Michel Sylvain, and Alex Darku at
different stages of the project.
235
236 Bernard Gauthier
shifted toward high-productivity firms; and whether an association exists

between productivity gains and the ability to export.
This chapter discusses the relationship between trade reform, exports,
and productivity. It examines the response of enterprises to the new environ-
ment of liberalized trade and exchange in terms of output and productivity
growth, and documents in more detail the export response to trade reforms.
The conclusion suggests three types of policies to enhance the export orien-
tation of Ugandan enterprises.
Trade Liberalization, Exports, and Productivity

In addition to improvements in the policy environment and macroeconomic
stability, the core element of the economic reform programs implemented and
supported by external donors in many Sub-Saharan African countries since
the late 1980s has been the implementation of trade liberalization and the de-
velopment of an outward-looking development strategy. Given the small size
of the domestic market in Africa and the dependency on imported intermedi-
ate goods and capital, the development of an export-oriented sector has been
perceived as essential for investment and development (Husain and Faruqee
1994; UNCTAD 1998; World Bank 1994). Trade liberalization and export orien-
tation is seen to have a positive effect on productivity and investment. The
perception is that exposure to international markets favors technology acqui-
sition and market discipline, allowing firms to achieve economies of scale. By
introducing competition among previously protected domestic firms, trade
reforms induce changes in firms’ behavior and performance.
The benefits of more open trade and an export orientation are transmit-
ted through several channels. Exposure to external competition encourages
domestic firms to adopt newer and more efficient technology or to use the
same technology with less waste or less x-inefficiency to reduce costs and
compete against international firms (Nishimizu and Robinson 1984). Fur-
thermore, the removal of less efficient firms, previously able to operate inef-
ficiently because of protection, results in a lower average cost and higher
productivity. The firms that remain in the industry must adjust by expand-
ing the scale of their production, exploiting economies of scale, and reducing
technical inefficiency. Because domestically produced goods cannot replace
imported intermediate and capital goods in developing countries, imported
inputs tend to increase knowledge and improve technical efficiency. At the
same time, increased imports and exports augment the spillover of interna-
tional technical knowledge (Grossman and Helpman 1991).
Despite these expected positive effects, more open trade and an outward-
oriented strategy may have adverse effects on domestic producers compet-
ing with imports. Rodrik (1988) and Tybout (1992) emphasize that a negative
transition cost could result for domestic producers in industries where econo-
mies of scale existed and that contract or exit due to greater import penetra-
tion in the domestic market.
Productivity and Exports 237
More generally, the potential benefits of trade liberalization and export

orientation have not been fully exploited in Africa, and some analysts con-
tend that this explains the development of the small industrial sector:
[M]anufacturing industries in Africa have not been exposed to
market discipline through exports, and in addition they have
failed to benefit from the scale advantages needed to compete
internationally. These factors have, in turn, further restricted
the development of such industries to small and sluggish do-
mestic markets, perpetuating high costs and giving rise to inef-
ficiencies and low levels of productivity (UNCTAD 1998, p. 196).
Empirical evidence of the effects of trade liberalization and export orien-
tation has been mixed. Pack (1988, p. 353) reviewed numerous empirical stud-
ies on the effects of export orientation on the industrial sector, observing that
“there is no clear confirmation of the hypothesis that countries with an exter-
nal orientation benefit from greater growth in technical efficiency in the com-
ponents sectors of manufacturing.” In the particular case of Sub-Saharan
Africa, some analysts doubt that more open trading conditions will produce
an industrial response. Several factors could compromise this response, in-
cluding inconsistent macroeconomic policies and weaknesses in institutions,
infrastructure, and available human resources. Indeed, even if economic re-
forms were credible and producers did respond to the new incentives, the
resulting productivity gains could be offset by declines in factor accumula-
tion (Elbadawi 1992; Matin 1992).
Several analysts have found evidence of output growth and productivity
gains following liberalization and export orientation in the African context.
Harrison (1994) analyzed the changes in firm behavior in Côte d’Ivoire and
found that liberalization had significant affected productivity. In Morocco,
Haddad (1993) found a positive relationship between productivity and ex-
ports at the firm level. She suggested that firms closest to the maximum effi-
ciency level tended to have high export shares.
Roberts and Tybout (1997) in their examination of four countries found
that differences in productivity within an industry are typically greater in
industries protected from international competition, suggesting that protec-
tion nurtures inefficiency. However, in another study of four countries, in-
cluding Morocco, Clerides, Lach, and Tybout (1998) found little evidence of
an export efficiency effect. By contrast, Bigsten and others (forthcoming), using
a four-country panel of African manufacturing firms in four sectors, found a
significant efficiency gain from exporting, the gains being even larger for
new entrants into the exporting market.
Using firm-level data from five sectors in Uganda, this chapter exam-
ines the evidence of association between productivity and exports within
the framework of trade liberalization. The next section examines the re-
sponse of enterprises to the new environment of trade liberalization and
economic reforms.
Enterprise Responses to Changing Incentives

This section examines firms’ responses to changes in incentives following
trade and economic reforms. It first looks at whether the firms shifted re-
sources toward tradable products by examining output responses between
1995 and 1997. It then examines whether firms improved their productivity
by constructing indexes of productivity performance and analyzing the
determinants of productivity growth to determine whether any differences
can be explained by the firms’ export orientation, the import intensity of in-
termediates, or other firm-level characteristics.
Nature of the Sample and Variables

The data used in this study comprise a balanced panel data set of 139 firms.1
Data were collected in a recent firm-level survey conducted in Uganda by
the World Bank and the Ugandan Private Sector Foundation during 1995–
97. Table A8.1 presents basic characteristics of the sample of firms drawn
from five sectors, representing a wide spectrum of private sector activities.
Firms are classified into three size categories based on the number of em-
ployees: small (5–20 employees), medium (21–100 employees), and large
(more than 100 employees). The distribution is also broken down accord-
ing to whether the firm was an exporter in 1997 and its reliance on im-
ported inputs. A firm is classified as an exporter if it exports any percent-
age of the value of its output. A firm is classified as imported-input intensive
when it imports more than 50 percent of the value of its inputs. Firms are
additionally classified by source of capital (domestic, foreign, and joint
ownership firms).
As illustrated in table A8.1, the agroprocessing and manufacturing sec-
tors are heavily represented, with 21 and 49 percent, respectively. While the
manufacturing sector is also the most important in terms of total output value
(52 percent), the agroprocessing sector is the most important in terms of total
employment (43 percent). Seventy-four percent of the firms in the sample are
domestically owned, but represent a much smaller proportion of total out-
put and employment.
Foreign firms are the most important for total employment (37 percent),
while the 11 percent of jointly owned firms account for more than 71 percent
of total output. With respect to market orientation, exporting firms account
1. The original data set comprised 243 firms in five sectors. Restricting the sample
to firms with complete time series in all variables of interest reduced the size of the
data set by about one-third. Of the remaining firms, those that reported data inconsis-
tent with the following criteria corresponding to twice the standard deviation were
rejected as data errors or outliers: replacement value of machinery and equipment
over gross output value greater than 50, growth in unit cost over the period greater
than 1.5, growth in gross output greater than 500 percent, and growth in employment
greater than 500 percent.
for almost half of total employment and nearly 40 percent of total output,
despite their representation of only a quarter of the sample in terms of num-
ber of firms. With respect to size distribution, large firms represent less than
20 percent of the sample, but employ 77 percent of the total work force and
account for 86 percent of total output value.
Table A8.2 presents the variables used in the empirical analysis of the
study, defined as follows. Output corresponds to sales revenue from all out-
put produced by the firm during the year. Capital is defined as the replace-
ment value of machinery and equipment. Intermediate inputs include the
cost of raw materials, utilities (telephone, electricity, water), and fuel. Wage
is the total wage bill, including allowances, benefits, bonuses, and statutory
payments. Labor is defined as total number of employees. Where applicable,
data are expressed in constant 1995 prices.
Output and Productivity Growth

A fundamental objective of trade liberalization and the economic reform pro-
gram in Uganda was to encourage the production of tradable goods. Firms
were expected to increase outputs if changes in relative prices increased prof-
itability. Furthermore, if markets were made more competitive by the removal
of trade barriers, domestic producers were expected to increase production
and reduce inefficiency in production. Were these goals achieved? To investi-
gate differences in the output and productivity responses of categories of
firms, several indicators of performance are constructed, including output
growth and productivity indexes.
Table A8.3 summarizes growth rates in real output for the categories of
firms during 1995–97. It presents unweighted and weighted averages, as well
as medians and interquartile ranges.2 All firm-level growth rates are cumula-
tive for the period 1995–97. As shown in table A8.3, output response was
relatively strong during the period, as the average firm shows an increase in
real output of more than 35 percent (unweighted) between 1995 and 1997 (29
percent weighted). There is, however, a wide variation across firms, as the
median output increased by 12 percent, but more than a quarter of the sample
exhibited negative output growth.
Breaking down the sample by sector reveals that output growth is con-
centrated in the manufacturing sector as well as the agroprocessing and com-
mercial agriculture sectors. Output-weighted figures in particular show an
increase of close to 50 percent in the real output value in manufacturing.
Export-oriented firms fared much better than nonexporting firms, with the
weighted average figures exhibiting an increase of 40 percent, compared with
only 15 percent for nonexporters. Unweighted average figures reveal a simi-
lar picture, although the gap is smaller.
2. Firm gross output is used as the weight, which is used to account for firms’
relative size within the sample in their contribution to the sample mean.
Regarding categories of input use, for firms relying intensely on domes-

tic inputs, the median firm recorded an increase of 13 percent in output, com-
pared with only 6 percent for firms relying principally on imported inputs.
However, average real output growth is greater for imported-input-
intensive firms than for domestic input firms because of a greater variation
in performance among the latter category of firms and, presumably, because
many of them produce tradable goods.
Regarding categories of ownership, foreign-owned firms did better than
domestically-owned firms. Joint ownership firms also performed better than
entirely domestic firms, with more than three-quarters of them recording posi-
tive output growth. Larger units fared better than other size categories during
the period, especially medium-size firms, as shown in the unweighted aver-
age of 35 percent compared with 20 percent, and the weighted average in-
crease of 36 percent compared with a drop of –3 percent for medium-size firms.
Although significant growth in real output was registered mainly by larger
producers in the categories of tradable goods producers, it is unclear whether
this increase paralleled an increase in productivity due to a shift of resources
from inefficient to efficient activities or through a more efficient use of re-
sources. To assess the effects of trade liberalization on firm-level productiv-
ity, four commonly used indexes of productivity are constructed: labor pro-
ductivity, total unit cost, TFP, and technical efficiency.
Labor productivity is measured as the logarithm of the output per em-
ployee in constant 1995 prices. Total unit cost is measured as the long-term
average cost of production in constant 1995 prices, and is calculated as the
logarithm of the cost of capital, wages, and intermediate inputs divided by
the value of gross output. The TFP represents the level of output not ex-
plained by the level of inputs. It is constructed as the residual of a constant
returns Cobb-Douglas production function using capital, labor, and material
as inputs (see annex 8.1 for details). Finally, technical efficiency is a continu-
ous index ranging from zero to one representing the degree to which firms
fail to reach a best practice frontier. This index is measured using the stochas-
tic frontier production function methodology (see Bauer 1990 or Schmidt and
Sickles 1984 for a survey). In this model, the best practice production frontier
is estimated that defines the maximum output achievable for a given set of
inputs. All firm output is then compared to this frontier. Deviations from the
frontier mean that the firm produces less than its technical capacity, imply-
ing some degree of inefficiency (see annex 8.1 for details).
Productivity Level
Table 8.1 presents the unweighted average levels for 1995–97 of each of the
four productivity indexes by firm category. All figures are presented in con-
stant 1995 prices. Examining the differences in productivity levels among
categories of firms confirms that all measures of productivity considerably
favor exporting firms. On average, exporters enjoy more than 60 percent
more output per employee than nonexporters, while for the average
Table 8.1. Productivity Levels by Firm Characteristics

(unweighted averages, 1995–97)
Number Labor Total factor

Characteristic of firms productivity Unit cost productivity Efficiency
By sector
Commercial
agriculture 16 8.54 1.94 2.75 0.27
Agroprocessing 29 20.19 4.86 1.95 0.18
Manufacturing 68 19.33 3.08 2.00 0.17
Construction 11 7.36 4.19 2.02 0.19
Tourism 15 5.44 1.37 3.25 0.23
By exporters
Exporter 32 22.22 1.96 2.41 0.23
Nonexporter 107 13.91 3.60 2.15 0.18
By importer
Domestic input
intensive 97 8.39 3.01 2.40 0.19
Imported input
intensive 42 32.99 3.73 1.77 0.19
By ownership
Local 103 9.46 5.53 2.24 0.18
Foreign 21 26.25 2.27 2.10 0.17
Joint 15 44.89 2.49 2.15 0.32
By size
Small 63 9.53 3.59 2.12 0.18
Medium 50 17.93 3.35 2.48 0.20
Large 26 27.02 2.10 1.91 0.22
Total 139 15.82 3.22 2.21 0.19
Note: Categories in 1995. Labor productivity, unit cost, and total factor productivity in logs.
Efficiency is a 0–1 index, where 1 indicates full efficiency.
Source: Author’s calculations based on the 1998 enterprise survey.
exporting firm the TFP index is more than 12 percent greater than for
nonexporters. Total cost per unit of revenue is 46 percent less for exporters,
and the index of technical efficiency is an average of 28 percent greater for
exporting firms, indicating more homogeneity in the distribution of export-
ers. These patterns are robust when measured by weighted averages, medi-
ans, or unweighted means.
Among categories of ownership, foreign-owned firms and those with joint
foreign and local ownership generally enjoy higher levels of productivity.
The labor productivity of local firms is almost five times less than that of
joint ownership firms; the total unit cost is twice as high and the efficiency
index is 44 percent lower. These patterns are similar for median and weighted
average figures (table A8.4).
Differences in productivity levels are also marked among sectors, because

the agroprocessing and manufacturing sectors exhibit close to 2.5 times more
labor productivity than the agriculture and construction sectors. Productiv-
ity levels by size categories are also as expected, because smaller firms ex-
hibit 65 percent less labor productivity than large firms, 70 percent higher
total costs per unit of revenue, and 19 percent less technical efficiency. With
respect to the TFP index, medium-size firms show a higher unweighted av-
erage and large firms show a higher weighted average (31 percent more than
small firms, see table A8.4), indicating that the larger segment of the large-
size category exhibits greater productivity levels.
Table 8.2 compares technical efficiency levels in Uganda with manufac-
turing firms in four other African countries. All technical efficiency figures
were computed using a random-effect model and estimated with a gener-
alized least squares approach. Table 8.2 reveals that among all five African
countries technical efficiency among exporting firms is consistently greater,
on average, than that of domestic-oriented firms. However, efficiency among
the sample of firms in Uganda is low among both exporters and
nonexporters relative to the other African countries. Low technical efficiency
in Uganda indicates more potential waste and x–inefficiency in produc-
tion. It may also indicate untapped opportunities for productivity improve-
ment through learning, possibly reflecting less homogeneity in technology
within the distribution of firms.
Productivity Growth
An increase in output generally leads to an increase in productivity because of
a reduction in idle capacity and better use of economies of scale. Furthermore,
if market competition were increased through trade liberalization, Ugandan
firms may have responded to the new environment by further improving their
productivity. Some preliminary evidence reveals better output response and
higher productivity levels, particularly from exporters.
Table 8.3 shows productivity growth among categories of firms and pre-
sents cumulative productivity growth rates for the four indexes by category.
Table 8.2. Efficiency Levels of Exporters in Five African Countries

(unweighted averages)
Category Uganda Cameroon Ghana Kenya Zimbabwe

Exporters 0.23 0.52 0.49 0.32 0.40
Nonexporters 0.18 0.31 0.25 0.18 0.34
All 0.19 0.38 0.27 0.22 0.37
Number of firms 139 50 93 70 94
Period 1995–97 1993–95 1991–93 1992–94 1992–94
Source: Author’s calculations based on the 1998 enterprise survey; Bigsten and others (2000,
table 3).
Table 8.3. Real Productivity Growth

(cumulative percentages unweighted, 1995–97)
Number Labor Total Total factor

Characteristic of firms productivity unit cost productivity Efficiency
By sector
Commercial
agriculture 16 –1.2 –4.6 14.5 –1.8
Agroprocessing 29 14.2 2.3 2.6 –0.2
Manufacturing 68 6.5 5.9 10.2 –4.9
Construction 11 –15.9 15.6 –11.5 0.8
Tourism 15 25.9 14.0 –0.8 1.9
By exporters
Exporter 32 25.8 1.1 10.4 7.3
Nonexporter 107 2.1 6.9 4.9 –5.3
By importer
Domestic input
intensive 97 2.0 7.1 4.3 –1.7
Imported input
intensive 42 20.5 2.0 10.5 –4.0
By ownership
Local 103 5.1 8.5 3.7 –3.6
Foreign 21 18.5 –4.5 21.2 6.5
Joint 15 9.0 –0.5 2.1 –6.7
By size
Small 63 6.3 8.5 8.8 –4.0
Medium 50 6.0 4.7 2.7 –3.2
Large 26 13.5 0.2 6.5 3.0
Total 139 7.5 5.6 6.2 –2.4
Note: Categories in 1995.
All figures are unweighted averages for 1995–97 in constant 1995 prices. An
examination of the four indexes of productivity reveals a mixed overall re-
sponse. While some indexes exhibit a positive trend, others have regressed.
Both unweighted and weighted average figures (see table A8.5) show im-
provements in labor productivity and TFP for the average firm in the sample,
with the related indexes rising by 8 and 6 percent, respectively (unweighted).
By contrast, total unit cost and technical efficiency exhibited a negative over-
all trend, with an increase in unit cost of 6 percent and a drop in efficiency of
2 percent. Significant differences in productivity performance among catego-
ries of firms explain these trends.
The export sector, however, performed noticeably better than domestic
market-oriented producers for all productivity indexes. During the period, la-
bor productivity grew more than 10 times faster, and total unit cost grew 6
times slower. Moreover, exporters recorded an (unweighted) average increase

in their TFP of 10 percent—compared with 5 percent for nonexporters—and
an increase of 7 percent in efficiency index, compared with a decline of 5 per-
cent for nonexporters. Interestingly, in terms of labor productivity, total unit
cost, and TFP, firms relying intensely on imported inputs achieved higher pro-
ductivity growth than firms relying on domestic inputs. With respect to size
categories, large firms performed better than smaller units, especially in terms
of labor productivity, efficiency, and lower unit cost growth. With respect to
ownership, foreign-owned firms fared better than their domestic counterparts
for all four productivity measures (both weighted and unweighted).
Table 8.4 compares technical efficiency growth in Uganda during the lib-
eralization period with observed efficiency growth in four other African coun-
tries also going though a process of trade liberalization. Efficiency growth in
the export sector in Uganda is consistent with similar growth observed in the
other four African countries, with export-oriented firms outperforming do-
mestic market-oriented producers during the liberalization period.
Explaining Productivity Growth

A series of regressions is estimated to more rigorously examine how eco-
nomic reforms produced increases in productivity. Firm-level productivity
is modeled as a function of various explanatory variables, including exports,
market participation, and other firm characteristics. More specifically, the
following equation is used:
(8.1) ∆Ait = α1DEit – 1 + α2Xit – 1 + eit
where ∆Ait is a measure of productivity growth calculated above for firm i at
time t, DEit – 1 is a dummy of initial exports, and Xit – 1 is a vector of exogenous
variables of firm characteristics, particularly size and sector.
In a small country like Uganda, exporting firms are expected to adjust
relatively easily to changes in relative prices and other external changes
due to the absence of demand constraints. Indeed, export-oriented firms
Table 8.4. Efficiency Growth of Exporters in Five African Countries

(cumulative percentages, unweighted)
Category Uganda Cameroon Ghana Kenya Zimbabwe

Exporters 7.3 12.8 15.2 8.4 8.6
Nonexporters –5.3 –9.8 –3.0 2.0 1.9
All –2.4 –2.6 –1.7 4.0 5.8
Number of observations 139 50 93 70 94
Period 1995–97 1993–95 1991–93 1992–94 1992–94
Source: Author’s calculations based on the 1998 enterprise survey; Bigsten and others (2000,
table 4).
exposed to a more competitive environment are expected to have a greater

incentive to increase productivity. To assess this incentive adequately, and
to identify the effect of exporting, a dummy variable takes the value of one
when a firm was an exporter initially and zero when it did not export at the
beginning of the period.
Equation (8.1) is estimated using Huber-White correction for
heteroskedasticity. Table A8.6 presents the results, which tend to confirm the
evidence presented in table 8.3. Export orientation is a significant determi-
nant of productivity growth according to several productivity measures. As
table A8.6 shows, the coefficients of the dummy variable of initial exporters
is positive and significant in both the TFP and technical efficiency regres-
sions, indicating that initial exporters tend to show higher growth of TFP
and efficiency compared with nonexporters during the period. As for labor
productivity growth, the export dummy, while not significant, has the ex-
pected positive sign, and the export dummy for total unit cost has the ex-
pected negative sign, as initial exporters exhibit a lower total cost per unit of
revenue over the period.
These results accord with the resource shift documented earlier toward
export-oriented activities and are consistent with those of Roberts and
Tybout (1997) and Kraay (1999), who observed that exporting firms are more
productive than their domestically-oriented counterparts. Indeed, Kraay
(1999), studying a panel of Chinese firms, also observed that past exports
were positively associated with higher growth in productivity measures.
The results are also consistent with those of Bigsten and others (2000) in a
study of a comparable group of Sub-Saharan countries. Using firm-level
panel data from four Sub-Saharan African countries (Cameroon, Ghana,
Kenya, and Zimbabwe), Bigsten and others (2000) examined the effects of
exporting on technical efficiency over a three-year period. They showed
that the effects were quite substantial, with initial exporters exhibiting 11
percent higher efficiency growth than nonexporters over the period. In
Uganda the effect of exporting on technical efficiency is also positive and
significant, indicating an important learning effect associated with export-
ing activities among the sample firms during the period.
Caution is necessary when analyzing these results because of endogeneity
problems between exporting and efficiency. On the basis of the present analy-
sis, it is impossible to answer the question of whether exporting leads to effi-
ciency gains or if the relationship runs from efficiency to exporting. Indeed,
according to several productivity measures, the correlation between export
status and ex post productivity levels suggests that high productivity precedes
entry into the export market. One likely explanation investigated in the recent
literature (but not yet pursued with the Ugandan survey data) is that high-
productivity producers can afford the cost of entering the export market (Rob-
erts and Tybout 1997). Work on U.S. firms and middle-income countries has
documented that high productivity levels correlate with subsequent entry (Ber-
nard and Jensen 1999). Further research would be required to disentangle the
direction of causality (see Bigsten and others 2000; Clerides, Lach, and Tybout
1998).3 In conclusion, export orientation is associated with significantly greater
output growth during the period of liberalization in Uganda, and with higher
productivity levels and growth in terms of several measures of productivity.
Export Response
As shown previously, trade liberalization in Uganda was accompanied by
output growth among export-oriented activities as well as greater levels
and growth in productivity among these firms. This section documents in
more detail the export response to trade liberalization. It examines the source
of export response by breaking down export growth by firm category (in-
cumbent, new entrants, and quitters), as well as the determinants of the
decision to export.
The sample in this section comprises a balanced panel data set of 177
firms that reported data on the decision to export, percentage of exports in
each year, and destination of exports.4 As can be seen from table A8.7, which
presents summary statistics on the exporters, the average percentage of ex-
ports to gross output value in the sample increased from 9 to 10 percent dur-
ing the period. Exporting firms exported an average of 37 percent of their
output in 1995, a figure that remained stable in 1997 (38 percent). When
weighted by the value of output to account for relative firm size, the weighted
export average increased to 15 percent of total sales value in 1997, up from 12
percent in 1995.
An interesting element concerns the destination of Ugandan exports and
the changes during the liberalization period. As reported in table 8.5, the
most important destination was Europe, which received 60 percent of total
export value in 1997, followed by East Africa and other non-European, non-
African countries, both with 18 percent.
Between 1995 and 1997, export values for the sample increased by 90 per-
cent. As documented in table 8.5, the largest increase over the period (327
3. Clerides, Lach, and Tybout (1998) have performed a type of Granger causality
test by using a full information maximum likelihood (FIML) estimator on a dynamic
model of productivity and exports with serially correlated errors, as well as a gener-
alized method of moments estimator on an average variable cost function. Examin-
ing three middle-income countries, they have not found evidence that exporting ex-
perience reduces costs, except in the apparel and leather products industries in
Morocco. Bigsten and others (2000), using a comparable nonparametric FIML dy-
namic model with correlated random effects, found a significant and positive effect
of export history on technical efficiency among manufacturing firms in four Sub-
Saharan countries.
4. Note that the sample in this section is larger by 38 firms than in the section on
enterprise responses. This is due to the smaller requirement in the number of variables
in each year in this section. Firm number 75 was deleted because of data-entry error.
Table 8.5. Nominal Exports Value and Shares by Destination, 1995–97
1995 1996 1997

U Sh U Sh U Sh
billions billions billions
Destination (current) Percent (current) Percent (current) Percent
East Africa 10.76 27.4 15.92 23.5 13.56 18.2
Rest of Africa 1.21 3.1 1.71 2.5 2.74 3.7
Europe 24.05 61.4 38.50 56.8 44.66 60.0
Other countries 3.16 8.1 11.71 17.2 13.48 18.1
Total exports 39.18 100.0 67.84 100.0 74.44 100.0
Note: Number of firms is 177.
percent) was registered in the “other countries” category (non-European and

non-African countries). This destination now represents 18 percent of total
export value in the sample, compared with just 8 percent in 1995. Exports to
the rest of Africa increased by 126 percent, but still represent a small fraction
of total exports (3 percent). European destinations increased by 86 percent
and represent the most important export destination with 60 percent of total
export value. With a below average increase in exports of 26 percent during
the period, regional exports to East African countries decreased in relative
terms from 28 to 18 percent of total export value between 1995 and 1997.
Did new firms enter the export market during the period of trade liberal-
ization? If so, decisions to enter the export market would signal the credibil-
ity of the trade reforms and suggest that entrepreneurs believed the future
benefits of foreign sales outweighed the start-up cost of exporting. To under-
stand this question in more depth, table A8.8 documents the transition pat-
tern for the 177 firms providing complete export data in the full sample be-
tween 1995 and 1997.
Of the 177 firms, 41 (23 percent) exported in 1995, compared with 47 in
1997 (27 percent). This increase is due to nine firms entering the foreign
market, while only three ceased exporting during the period, leaving a net
entry of six firms. All nine of the new entrants export to Africa, three to the
East African market exclusively, three to other African markets, and three
to Africa and elsewhere. All three of the firms that ceased exporting during
the period were active in the European market. Still, earlier export growth
figures show the African market entrants and European market quitters
left the overall market share of European destinations unchanged at 60 per-
cent of total value, while the relative importance of African markets de-
creased from 31 to 22 percent.
The situation in Uganda is relatively similar to that in Cameroon follow-
ing trade liberalization and devaluation. In Cameroon, between 1993 and
1995 few firms entered the export market: the net entry rate was only 5 per-
cent (11 entrant and 1 quitter among a sample of 187 firms). Essentially, most
of the entry and exit was in the African market among relatively small firms.
None of the exporters specializing in the African market entered the Euro-
pean market and few selling outside Africa began selling in African markets
(see Tybout and others 1997). The pattern in Cameroon suggested that the
two export markets were segmented, which appears to be the case in Uganda.
Similarly, in Chad and Gabon, where trade and exchange rate reforms
affected the relative profitability of different markets between 1993 and 1996,
essentially no shift occurred between markets during the period. Entry and
exit from the export market occurred only for exporters to Africa and among
small firms. The net entry rate was negative in Gabon (3 firms exited and 1
firm entered among a sample of 80 firms), while in Chad 2 new firms started
exporting within the regional free-trade area (among a sample of 54 firms)
during the period. Thus, sunk costs for export market entry appeared rela-
tively high (see Barba Navaretti, Faini, and Gauthier 1998).
The source of the growth in exports and differences in behavior among
categories of firms in Uganda can be understood more clearly through a de-
composition analysis. Following Barba Navaretti, Faini, and Gauthier (1998);
Sullivan, Tybout, and Roberts (1995); and Tybout and others (1997), nominal
export growth is broken down by three categories of firms, incumbent ex-
porters (continuous), new exporters (entrants), and quitters.5
The incumbent effect in table A8.9 is the contribution of continuous ex-
porters to samplewide export growth. This is a weighted average of the
growth in exports among firms that continue to sell abroad, the weights
being their share in total exports. The net entry effect measures the effect of
net changes in the number of exporters on growth, that is, the difference
between the number of firms that enter the export market between periods
5. The following equation is used for decomposition:
Q tf – Qqqq
f f
Q itf – Qqqqq
f f f
t–1
Qqft – 1
= Σ
i∈c ( Qqqqq
f
Qqqqq
t–1
)(
it – 1 it – 1
Qqfit – 1
+) Σ( ) Σ( )
i∈e
Qqqq
it
f
Qqqqq
t–1
–
i∈q
Qqqqq
it – 1
f
Qqqqq
t–1
Q itf – Qqqqq
f
netf – nqqqq
f
Q etf – Qqqqq
f
Q etf – Qqqqq
f
netf – nqqqq
f
= Σ S it – 1
i∈c
f
( it – 1
Qqfit – 1 ) (
+ qt – 1
nqft – 1 )( ) (
f
2Qqq
t–1
)(
qt – 1
+ f
Qqq
qt – 1
t–1
f
2nqq
t–1
)
qt – 1
where Sitf – 1 denotes the share of total exports of the ith firm in year t – 1, nf refers to the
number of exporting firms, Qtf is output value sold in foreign markets during year t,
and overbars denote period averages. The index i stands for the ith firm, e subscripts
refer to firms entering the export market, q subscripts refer to firms that will quit the
export market during the next period, and c subscripts to continuous exporters. Ag-
gregates without these subscripts refer to the entire set of exporting firms (see Sullivan,
Tybout, and Roberts 1995 for further details).
t – 1 and t, and the number of firms that cease exporting over the same
interval. The turnover effect describes the effect on export growth of re-
placing firms ceasing to export with firms entering the export market. Note
that if quitters and entrants export the same value per firm, the turnover
effect is zero. However, if large exporters leave foreign markets and small
exporters enter them, turnover can lead to a decrease in total export value.
Table A8.9 presents the results of the breakdown; it also shows the result of
a similar decomposition performed on data from Cameroon and Gabon.
Note that the incumbent effect, the net entry effect, and the turnover ef-
fect in the table sum to nominal export growth. In addition, both the net
entry effect and the turnover effect break down into their multiplicative com-
ponents. For example, the net entry rate times the relative size of entrants
equals the net entry effect.
As observed from table A8.9, the net entry rate in Uganda was 12 percent
between 1995 and 1997. However, new exporting firms exported, on average,
only 35 percent as much per firm as incumbent exporters (see relative size), so
the net entry effect amounted to only 4 percent of total growth in export value.
Furthermore, the export value of entrants represented only 51 percent as much
per firm as that of quitters over the sample period, so the replacement of exit-
ing firms with entering firms tended to reduce total export value. Indeed, ac-
cording to the observed pattern, some large-scale exporters dropped out of
foreign markets, and the firms that replaced them exported less.
Combining these entry and exit effects, virtually all the export growth in
the sample in Uganda between 1995 and 1997 can be attributed to incumbent
firms (95 percent). The Ugandan pattern is reminiscent of that observed in
Cameroon and Gabon following trade liberalization in which no export boom
was observed (table A8.9). Indeed, export growth in these countries occurred
among incumbent firms and did not result from a surge of new entrants into
the export market. This contrasts with export booms in Mexico, Morocco,
and Columbia driven by a net entry of more than 50 percent of total growth
of exports over a five-year period (Roberts and Tybout 1995).
Tables 8.5 and A8.8 show that the growth in export value by existing pro-
ducers in Uganda takes place in the European and other non-African coun-
tries. As noted earlier, the few new producers in the export market represent
regional exporters to Africa and tend to be smaller. This pattern may indicate
the existence of significant start-up costs for the export market, especially to
non-African countries.
It thus appears that despite regional initiatives and the various trade re-
forms implemented in Uganda since the late 1980s, a number of constraints
on export development still exist. As reported in the Uganda survey, trade
regulation is still perceived as a constraint by exporters and private busi-
nesses considering the export market. Figure 8.1 shows that constraints on
export increases principally relate to the cost of transportation, the lack of
finance, and the quality of transportation due to poor infrastructure. For the
Figure 8.1. Main Constraints to Increased Exports
Cost of
transportation
Quality of
transportation
Lower profitability
in exports
Lack of finance
1 2 3 4 5
obstacle
Firm Size
Large Medium Small
larger exporters, transportation costs are the main issue; for the smaller ex-
porters it is lack of finance. As figure 8.2 shows, the elements that prevent
firms from starting to export are associated mainly with the cost of transpor-
tation, lack of finance, and lack of information about export markets. Again,
the larger firms tend to cite transportation costs as the main constraint, while
smaller ones cite lack of finance.
To further pursue the conjecture of significant start–up costs for the ex-
port market, the export behavior of firms in the sample is explained using a
simple model of the decision to export. This choice relates to evolution and
level of total unit cost, controlling for previous export history and sector-
based characteristics. Table A8.10 presents the results of two simple regres-
sions performed on the Ugandan survey data and contrasts them with simi-
lar regressions performed on Cameroonian firms. The dependent variable is
a dummy that takes the value of one if the firm exported at the end of the
period and zero otherwise.
As shown in the first regression, (a), expressing the probability of export-
ing in the last period as a function of cost and industry dummies, firms in
Uganda with lower total unit costs are more likely to be exporters. Similar
results were observed in Cameroon among a sample of 114 firms between
1992/93 and 1994/95 (Tybout and others 1997). These results imply that
measures to reduce unit costs (through an increase in output price relative to
intermediate price) should induce firms to enter the export market.
Figure 8.2. Main Constraints to New Exporters
Cost of
transportation
Quality of
transportation
Lower profitability
in exports
Lack of finance
1 2 3 4 5
obstacle
Firm Size
Large Medium Small
The second regression, (b), accounts for export history and controls for
initial cost and changes in average cost. Table A8.10 shows that in Uganda, as
in Cameroon, unit cost at the beginning of the period and change in cost
have the expected negative sign but are not statistically significant. The ini-
tial exporter dummy is positive, however, as well as significant, indicating
that firms that have already adapted their products and processes and estab-
lished distribution channels and mechanisms to deal with custom authori-
ties will be more likely to export at the end of the period. Still, there are also
other firm characteristics that may remain important over time, such as loca-
tion, foreign ownership status, managerial skills, and so forth, that relate to
the firm’s capacity to be an exporter.
In short, substantial export growth occurred in Uganda during the pe-
riod of trade liberalization. However, for the most part this growth can be
explained by increased exports by firms already active in the export mar-
ket. New entry is limited in terms of number of firms and relative impor-
tance. This may suggest that, as observed in previous studies in Cameroon,
Chad and Gabon, the barriers to export market entry remain high in Uganda.
Indeed, only a small number of firms shifted toward the export market.
The small number of entries likely reflects the existence of start-up costs. If
such costs are high, firms are reluctant to redirect their operations toward
foreign markets and incur costs for retooling, establishing distribution chan-
nels, and researching foreign market conditions. As suggested in the small
net entry effect, the reforms associated with trade liberalization may not
have been enough to convince firms that incurring these costs is a wise
business decision (see Barba Navaretti, Faini, and Gauthier 1998; Tybout
and others 1997).
Conclusions
Using the detailed information collected in the 1998 survey of firms by the
World Bank and the Ugandan Private Sector Foundation, this chapter shows
that trade liberalization has been accompanied by significant growth in
output and productivity in Uganda’s private sector firms. Reallocation of
resources toward the efficient export sector is apparent as export-oriented
firms show almost 50 percent more growth, on average, in real output
(unweighted) compared with nonexporters during the period. Furthermore,
using several measures of productivity, a significant productivity gap ap-
pears between exporters and firms producing exclusively for the domestic
market. Exporters enjoy, on average, more than 60 percent more output per
employee than nonexporters, while for the average firm the TFP index is
more than 12 percent greater than for nonexporters. Total cost per unit of
revenue is 46 percent less for exporters, and the index of technical efficiency
is also 28 percent greater, on average, for exporting firms. In addition, ex-
porters achieved significantly more productivity growth during the period
compared with nonexporters, particularly in terms of TFP and efficiency
growth. Whereas the export sector is growing in nominal value terms and
relative to total industry sales, few new firms appear to be entering the
market. Those who do so tend to be smaller than existing exporters and
focus on the African market. The Ugandan pattern of export growth in the
absence of an export boom is similar to that observed in Cameroon, Chad,
and Gabon, where export growth following liberalization and foreign ex-
change modification was due to incumbent firms rather than to a surge of
new entrants into the export market.
The absence of an export boom points toward the substantial role played
by start-up costs in reducing firms’ response to relative price changes and
policy reforms. The findings suggest that trade liberalization and export ori-
entation in Uganda can be enhanced by three types of policies, namely:
• Policies that emphasize both increased specialization of incumbent

producers in the export market and reduced barriers faced by new
exporters.
• Policies that identify and correct factors that prevent firms from in-
vesting in new equipment, upgrading product quality, and research-
ing foreign markets to the extent necessary for export market entry.
• Policies that target deficiencies in public infrastructure and regulatory
constraints, particularly those that add to production and transport.
Annex 8.1. Productivity Measures

The four indexes of productivity used in this chapter are constructed as fol-
lows. It is assumed that production relationships at the firm level can be char-
acterized by a general function of the form Q = f(K, L, M, A), where Q is gross
output, K is our measure of capital, L is labor, M is material, and A is a pro-
ductivity index. Assuming a neoclassical Cobb-Douglas production function,
a measure of total factor productivity is given by
(A8.1) ln Aijt = ln Qijt – sKjt ln Kijt – sLjt ln Ljti – sMjt ln Mijt
where i is the index of the ith firm (i = 1.......N) at time t in sector j, while svjt is
the share of the vth input in total costs. Assuming that firms behave optimally
and that factors are remunerated at the value of their marginal product, out-
put elasticities could be associated with input shares. These output elastici-
ties are calculated for labor and material inputs in each sector j at each period
as the current price ratios of total wages and materials to gross output value,
in that sector and that year. Furthermore, assuming a constant return to scale,
the capital output elasticity is measured as one minus the two other elastici-
ties. (Table A8.11 presents these output elasticities by sector and by year used
in the computation of the TFP index.)
Growth rate in the productivity measure, which gives the variation in
output not explained by input changes, is obtained through a second-order
Tornqvist approximation given by
(A8.2) ∆ln Aijt = ∆ln Qijt – s Kj ∆ln Kijt – s Lj ∆ln Ljti – s Mj ∆ln Mijt
where s j is the share of the vth input in total costs in sector j, averaged over
the two periods.
The technical efficiency index is measured using the stochastic frontier
production function methodology. In this model a production frontier is esti-
mated that defines the maximum output achievable for a given set of inputs.
The degree to which firms fail to reach the frontier is attributed to ineffi-
ciency of production. Note that the stochastic element of the model allows
some observations to lie above the frontier, which makes the model less vul-
nerable to the influence of outliers than deterministic models. Assuming again
a Cobb-Douglas production function, the frontier technology can be repre-
sented in the following form:
(A8.3) ln Yijt = αijt + α1 ln Kijt + α2 ln Lijt + α3 ln Mijt + vit + uit,
where yit is the observed value of gross output of the ith firm (I = 1.......N) at
time t, K represents the replacement value of equipment, L the total number
of employees, and M the value of intermediate inputs, in firm i in period t,
and αi is a vector of technology parameters to be estimated.
The compound disturbance is composed of two terms. The first, vit, is a
random disturbance assumed to be distributed identically and independently
across plants as N(0, σ2). It represents factors such as luck, weather condi-
tions, and unpredicted variation in inputs. The second, uit, is a firm-specific
effect that reflects firm efficiency and management skills. Its distribution is
one-sided, reflecting the fact that output must lie on or below the frontier. uit
is assumed to be independently and identically distributed across plants as
the nonpositive part of a N(µ, σ2) distribution truncated above at zero. Both v
and u are assumed to be distributed independently of the exogenous vari-
ables in the model.
Following Aigner and Schmidt (1977), Jondrow and others (1982), and
Battese and Coelli (1992), an estimate of the efficiency measure of the ith firm
at the t time period is given by
(A8.4) effit = exp(ûit).
Table A8.12 presents the estimated coefficients of the production function
using a random-effect estimator (generalized least square). Furthermore, la-
bor productivity is measured as the logarithm of the ratio of output per em-
ployee, while total unit cost is measured as the long-term average cost of
production
(A8.5) UCit = ln(LRCit) – ln(Qit),
where LRCit is the long-run cost of firm i at time t, as measured by the loga-
rithm of the cost of capital, wages, and intermediate inputs, and Qit is value
of gross output of firm i at time t.
Table A8.1. Distribution of Sample by Categories, 1997
Number Employment Gross output value a

Category of firms Percentage of total Mean Percentage of total Mean Percentage of total
By sector
Commercial agriculture 16 11.5 58.6 6.2 451.4 1.7
Agroprocessing 29 20.9 225.4 43.1 5,972.7 40.9
Manufacturing 68 48.9 60.9 27.3 3,209.3 51.5
Construction 11 7.9 265.9 19.3 1,944.4 5.0
Tourism 15 10.8 42.8 4.2 233.2 0.8
By ownership
Local 103 74.1 50.8 34.5 712.6 17.3
Foreign 21 15.1 263.6 36.5 2,432.3 12.1
Joint 15 10.8 294.1 29.1 19,937.9 70.6
255
By exporters
Exporter 37 26.6 195.2 47.6 6,950.7 39.3
Nonexporter 102 73.4 78.0 52.4 1,631.1 60.7
By importer
Domestic input intensive 94 67.6 111.0 68.7 1,883.1 41.8
Imported input intensive 45 32.4 105.5 31.3 5,479.6 58.2
By size
Small 63 45.3 13.1 5.4 156.4 2.3
Medium 50 36.0 52.9 17.4 1,032.5 12.2
Large 26 18.7 450.4 77.1 13,927.6 85.5
Total 139 100.0 109.2 100.0 3,047.1 100.0
a. Gross output value in million Ugandan shillings.
Table A8.2. Summary Statistics of Variables

(average, 1995–97)
Sample standard
Variable Sample mean deviation Minimum Maximum
Output 2,491.6 9,312.2 1.0 73,933.3
Capital 2,875.9 13,082.9 0.1 99,933.3
Employment 101.1 254.6 3.0 1,866.7
Wage cost 177.3 651.3 0.2 6,154.5
Intermediate inputs 1,074.8 4,969.9 0.3 56,239.9
Foreign (%) 15.0 35.9 0.0 100.0
Share exported (%) 9.0 23.4 0.0 100.0
Note: Output, capital, wage cost, and intermediate inputs are in millions of constant 1995
Ugandan shillings. The number of firms is 139.
Table A8.3. Real Output Growth by Firm Characteristics

(cumulative percentage, 1995–97)
Number Unweighted Weighted Interquartile

Category of firms average average a Median range
By sector
Commercial
agriculture 16 31.2 13.2 14.0 –3.8 to 41.5
Agroprocessing 29 26.2 11.6 11.7 –21.8 to 39.7
Manufacturing 68 27.9 49.1 9.6 –18.5 to 40.0
Construction 11 7.1 28.6 15.5 –27.8 to 32.2
Tourism 15 18.7 4.9 9.6 –24.8 to 47.5
By ownership
Local 103 18.8 10.1 10.8 –23.1 to 38.3
Foreign 21 59.7 21.5 13.2 –7.7 to 88.7
Joint 15 21.4 36.4 15.4 0.4 to 43.6
By exporters
Exporter 32 33.8 39.9 18.2 –7.8 to 47.6
Nonexporter 107 22.7 15.2 9.6 –21.8 to 37.9
By importer
Domestic input
intensive 97 21.6 20.6 13.3 –20.9 to 40.4
Imported input
intensive 42 33.8 34.9 6.0 –19.2 to 38.3
By size
Small 63 25.8 10.3 6.4 –23.2 to 39.1
Medium 50 19.5 –26.0 15.3 –13.2 to 41.2
Large 26 35.1 36.1 14.4 –7.6 to 47.5
Total 139 25.3 29.2 11.7 –19.2 to 40.4
a. Weighted by firms’ gross output.
Note: Categories in 1995.
Table A8.4. Productivity Levels by Firm Characteristics

(weighted averages, 1995–97)
Number Labor Total factor

Characteristic of firms productivity Unit cost productivity Efficiency
By sector
Commercial
agriculture 16 8.50 0.99 2.89 0.72
Agroprocessing 29 23.87 1.51 4.12 0.52
Manufacturing 68 42.35 2.04 1.40 0.28
Construction 11 7.00 1.02 3.29 0.19
Tourism 15 4.83 1.44 3.59 0.20
By exporters
Exporter 32 29.45 1.88 3.37 0.46
Nonexporter 107 19.52 1.50 2.14 0.32
By importer
Domestic input
intensive 97 14.27 0.89 4.67 0.53
Imported input
intensive 42 44.98 2.27 1.61 0.31
By ownership
Local 103 37.16 1.76 1.87 0.16
Foreign 21 55.73 1.37 2.44 0.19
Joint 15 79.07 1.77 3.20 0.51
By size
Small 63 10.28 2.27 2.26 0.21
Medium 50 20.93 1.16 2.35 0.25
Large 26 27.18 1.81 2.95 0.44
Total 139 24.23 1.71 2.83 0.40
Note: Observations are weighted by the firm gross output value. Labor productivity, unit cost,
and total factor productivity in logs. Technical efficiency is a zero to one index, where one indicates
full efficiency.
Table A8.5. Real Productivity Growth

(cumulative percentages weighted, 1995–97)
Number Labor Total unit Total factor

Characteristic of firms productivity cost productivity Efficiency
By sector
Commercial
agriculture 16 3.4 –7.4 6.1 1.0
Agroprocessing 29 63.1 17.5 –19.9 –12.4
Manufacturing 68 23.3 –15.7 25.1 3.9
Construction 11 3.5 0.0 9.7 –1.9
Tourism 15 30.7 14.0 –8.2 –2.9
By exporters
Exporter 32 71.4 –1.9 2.5 –1.7
Nonexporter 107 5.3 5.4 2.1 –7.5
By importer
Domestic input
intensive 97 42.0 7.8 –9.8 –1.0
Imported input
intensive 42 25.6 –3.1 10.4 –6.4
By ownership
Local 103 –8.2 11.7 2.1 –6.1
Foreign 21 6.2 –4.1 11.8 2.5
Joint 15 12.7 –0.9 0.6 –4.9
By size
Small 63 2.6 9.3 3.1 –4.6
Medium 50 8.5 4.8 0.4 –11.2
Large 26 45.6 0.3 2.7 –2.8
Total 139 36.7 1.3 2.3 –4.2
Note: Observations are weighted by the firm’s gross output value.
Table A8.6. Regression of Productivity Growth

(dependent variable: ∆lnA)
Labor Total unit Total factor

Independent variable productivity cost productivity Efficiency
Constant –0.002 0.234b –0.014b –0.109
(0.788) (2.223) (2.376) (0.838)
Initial export 0.009 –0.093 0.006a 0.154a
(0.959) (–1.291) (1.663) (1.687)
Agricultural –0.010 –0.244a 0.014b 0.071
(0.724) (–1.828) (2.077) (0.555)
Agroprocessing –0.002 –0.161 0.003 0.071
(0.135) (–1.308) (0.446) (0.462)
Manufacturing –0.003 –0.149 0.011a 0.070
(0.219) (–1.305) (1.765) (0.394)
Construction –0.016 –0.045 0.007 0.129
(–1.102) (–0.225) (0.971) (0.934)
Medium 0.004 –0.025 –0.001 –0.018
(0.721) (–0.297) (0.197) (0.332)
Large –0.002 –0.052 0.002 –0.006
(0.187) (–0.566) (0.497) (–0.967)
Sample size 278 278 278 278
R2 0.036 0.032 0.056 0.034
Note: Robust t-statistics in parentheses. Initial export is a dummy that takes the value of one if
the firm exported at the beginning of the period and zero otherwise. Sector and size dummies
take the value of one if the firm is in the category and zero otherwise. The service sector and the
small-size dummies are omitted.
Table A8.7. Summary Statistics of Exporters, 1995–97
Category 1995 1996 1997

Exporters in the sample (percent) 23.2 26.6 26.6
Number of firms 41 47 47
Export (percent) 39.2 36.9 37.9
Export/gross output value (unweighted) 9.1 9.8 10.1
Mean output
Nonexporter 1.159 1.38 1.61
Exporter 4.479 5.49 6.05
Employment
Nonexporter 60.4 62.7 74.1
Exporter 178.5 189.9 190.1
Note: Mean output in billions of Ugandan shillings. Number of firms is 177.
Table A8.8. Exporting Status, 1995 versus 1997
1997 status
Other Joint
East Africa Rest of Europe countries Joint Africa and
1995 status only Africa only only only Africa elsewhere Nonexporter Total
East Africa only 6 0 0 0 0 0 1 7
261
Rest of Africa only 0 5 0 0 0 0 0 5
Europe only 0 0 1 2 0 0 2 5
Other countries only 0 0 0 3 0 2 0 5
Joint Africa 0 0 0 0 2 0 0 2
Joint Africa and elsewhere 0 0 0 0 0 17 0 17
Nonexporter 4 3 0 0 0 2 127 136
Total 10 8 1 5 2 21 130 177
Table A8.9. Nominal Export Growth Decomposition, Selected African

Countries
(percentage)
Category Uganda Cameroon Gabon

Nominal export growth 92.9 82.5 115.2
Incumbent effect 94.9 85.4 115.4
Net entry effect 4.1 8.6 –23.7
Net entry rate 12.0 20.8 –10.0
Relative size 0.345 0.413 0.237
Turnover effect –6.14 –11.5 –1.53
Turnover rate 12.0 43.8 25.0
Size difference –0.512 –0.26 –0.06
Period 1995–97 1993–95 1993–96
Source: Author’s calculations based on the 1998 enterprise survey for Uganda; Tybout and
others (1997) for Cameroon; Barba Navaretti, Faini, and Gauthier (1998) for Gabon.
Table A8.10. Probit Models of the Decision to Export, Uganda and

Cameroon, 1997
Uganda Cameroon a
Independent variable (a) (b) (a) (b)
Constant 1.512c 0.058 –0.433 –0.944
(0.513) (0.888) (–0.198) (–0.29)
Ln (UC) initial n.a. –0.185 n.a. –0.325
n.a. (0.224) n.a. (0.336)
Ln (UC) final –0.193 n.a. –0.343c n.a.
(0.153) n.a. (0.115) n.a.
∆Ln (UC) n.a. –0.349 n.a. –0.125
n.a. (0.527) n.a. (0.176)
Exporter (initial) n.a. 3.277c n.a. 1.513c
n.a. (0.644) n.a. (0.312)
Agricultural –2.307c –2.075b n.a. n.a.
(0.632) (1.153) n.a. n.a.
Agroprocessing –2.045c –1.780b n.a. n.a.
(0.588) (–1.018) n.a. n.a.
Manufacturing –2.314c –1.263 n.a. n.a.
(0.546) (0.926) n.a. n.a.
Construction –8.289 –6.867 n.a. n.a.
(21,124.9) (21,044.2) n.a. n.a.
Wood product n.a. n.a. 0.036 –0.011
n.a. n.a. (0.307) (0.403)
Textiles/apparel n.a. n.a. –0.009 –0.049
n.a. n.a. (0.301) (–0.407)
Metal products n.a. n.a. –0.159 –0.19
n.a. n.a. (0.267) (0.372)
Sample size 126 126 114 114
Log-likelihood
function –52.250 –25.36 — —
— Not available.
Note: Standard error in parentheses. Ln (UC) is the log of unit cost, and ∆Ln (UC) is the variation
in the log of unit cost during the period. Exporter (initial) is a dummy variable that takes the
value of one if the firm in an exporter in the first period and zero otherwise. Sector dummies
take the value of one if the firm is part of the category and zero otherwise. The service sector
dummy is omitted in Uganda, and the food sector dummy is omitted in Cameroon. Initial periods:
Uganda 1995, Cameroon 1993. Final periods: Uganda 1997, Cameroon 1995.
a. Cameroon: Export dummy in 1995.
Source: Author’s calculations based on 1998 enterprise survey for Uganda; Tybout and others
(1997) for Cameroon.
Table A8.11. Output Elasticities Used in Computing the TFP, 1995–97
Sector Factor 1995 1996 1997

Commercial agriculture Labor 0.212 0.206 0.198
Materials 0.244 0.228 0.221
Capital 0.543 0.566 0.581
Agroprocessing Labor 0.155 0.121 0.109
Materials 0.592 0.542 0.535
Capital 0.254 0.337 0.356
Manufacturing Labor 0.125 0.124 0.132
Materials 0.463 0.431 0.436
Capital 0.412 0.445 0.432
Construction Labor 0.193 0.165 0.163
Materials 0.388 0.379 0.326
Capital 0.419 0.456 0.511
Tourism Labor 0.179 0.153 0.173
Materials 0.240 0.197 0.218
Capital 0.581 0.650 0.610
Total Labor 0.153 0.139 0.141
Materials 0.435 0.401 0.400
Capital 0.413 0.460 0.459
Note: Output elasticities for labor and materials are calculated as the share expenditures on
materials (including intermediate inputs, utilities, and fuel) and wages (including allowances,
bonuses, and statutory payments), respectively. The capital elasticity is calculated as one minus
the other two elasticities (see text for details).
Table A8.12. Estimated Parameters of the Frontier Production Function
Independent variable Random effect

Constant 3.586a
(8.755)
Labor 0.151a
(4.361)
Capital 0.132a
(5.036)
Intermediate inputs 0.692a
(30.728)
Sample size 139
R2 0.857
Note: Standard error on parentheses.
References
Aigner, Denis, and Peter Schmidt. 1977. “Formulation and Estimation of Sto-
chastic Frontier Production Function Models.” Journal of Econometrics
6(1): 21–37.
Barba Navaretti, Giorgio, Ricardo Faini, and Bernard Gauthier. 1998. “Enter-
prise Response to the Devaluation and Fiscal Reforms in Chad and
Gabon.” Union douanière et économique de l’Afrique centrale (UDEAC)
and World Bank, Africa Region, Washington, D.C. Processed.
Battese George E., and Tim J. Coelli. 1992. “Frontier Production Functions,
Technical Efficiency and Panel Data: With Application to Paddy Farm-
ers in India.” The Journal of Productivity Analysis 3(1–2): 149–65.
Bauer, Paul W. 1990. “Recent Developments in the Econometric Estimation
of Frontiers.” Journal of Econometrics 46(October–November): 39–56.
Bernard, Andrew B., and J. Bradford Jensen. 1999. “Exporting and Pro-
ductivity.” Yale School of Management, New Haven, Connecticut.
Processed.
Bigsten, Arne, Paul Collier, Stefan Dercon, Marcel Fafchamps, Bernard
Gauthier, Jan Gunning, Jean Haraburema, Abena Oduro, Remco
Oostendorp, Catherine Pattillo, Mans Soderbom, Francis Teal, and
Albert Zeufack. 2000. “Exports and Firm-Level Efficiency in African
Manufacturing.” Working Paper Series 2000.16. Oxford University,
Centre for the Study of African Economies, U.K.
_____. Forthcoming. “Are There Efficiency Gains from Exporting in African
Manufacturing.” In Augustin Kwasi Fosu, Saleh Nsouli, and
Aristomene Varoudakis, eds., Policies to Foster Manufacturing Competi-
tiveness in Sub-Saharan Africa. Paris: Organisation for Economic Co-
operation and Development, Development Centre.
Clerides, Sofronis, Saul Lach, and James Tybout. 1998. “Is Learning by Ex-
porting Important? Micro-Dynamic Evidence from Colombia, Mexico,
and Morocco.” Quarterly Journal of Economics 113(3): 903–47.
Elbadawi, Ibrahim A. 1992. “World Bank Adjustment Lending and Economic
Performance in Sub-Saharan Africa in the 1980s: A Comparison of Early
Adjusters, Late Adjusters, and Nonadjusters.” Policy Research Work-
ing Paper no. 1001. World Bank, Development Research Group, Wash-
ington, D.C.
Grossman, Gene M., and Elhanan Helpman. 1991. Innovation and Growth in
the Global Economy. Cambridge, Massachusetts: MIT Press.
Haddad, Mona. 1993. “How Trade Liberalization Affected Productivity in

Morocco.” Policy Research Working Paper no. 1096. World Bank, De-
velopment Research Group, Washington, D.C.
Harrison, Ann E. 1994. “Productivity, Imperfect Competition, and Trade Reform:
Theory and Evidence.” Journal of International Economics 36(1–2): 53–73.
Husain, Ishrat, and Rashid Faruqee, eds. 1994. Adjustment in Africa: Lessons
from Country Case Studies. World Bank Regional and Country Studies.
Jondrow James, C. A. K. Lovell, I. S. Materov, and P. Schmidt. 1982. “On Esti-
mation of Technical Inefficiency in Stochastic Frontier Production
Model.” Journal of Econometrics 19(2–3): 233–38.
Kraay, Aart. 1999. “Exportations et performances économiques: étude d’un
panel d’entreprises chinoises.” Revue d’Economie du Developpement 7(1–
2): 183–207.
Lovell, C.A.K., J. Defourny, and A.G.M. N’Gbo. 1992. “Variation in Produc-
tive Efficiency in French Workers Cooperative.” Journal of Productivity
Analysis 3(1–2): 103–117.
Matin, Kazi M. 1992. “Openness and Economic Performance in Sub-Saharan
Africa: Evidence from Time-Series Cross-Country Analysis.” Policy
Nishimizu, Mieko, and Sherman Robinson. 1984. “Trade Policies and Pro-
ductivity in Semi-Industrialized Countries.” Journal of Development
Economics 16(1–2): 177–206.
Pack, Howard. 1988. “Industrialization and Trade.” In Hollis Chenery and T.
N. Srinivasan, eds., Handbook of Development Economics. Amsterdam:
North-Holland.
Roberts, Mark, and James R. Tybout. 1995. “An Empirical Model of Sunk
Costs and the Decision to Export.” Policy Research Working Paper
Processed.
_____. 1997. “Producer Turnover and Productivity Growth in Developing
Countries.” The World Bank Research Observer 12(1): 1–18.
Rodrik, Dani. 1988. “Imperfect Competition, Scale Economies and Trade Policy
in Developing Countries.” In Robert E. Baldwin, ed., Trade Policy Is-
sues and Empirical Analyses. National Bureau of Economic Research
Conference Report Series. Chicago: University of Chicago Press.
Schmidt, Peter, and Robin C. Sickles. 1984. “Production Frontiers and Panel
Data.” Journal of Business and Economic Statistics 2(4): 367–74.
Sullivan, Theresa, James R. Tybout, and Mark Roberts. 1995. “What Makes
Exports Boom? Evidence from Plant-Level Panel Data.” World Bank,
Africa Region, Washington, D.C. Processed.
Tybout, James R. 1992. “Linking Trade and Productivity: New Research Di-
rections.” World Bank Economic Review 6(2): 189–211.
Tybout, James R., Bernard Gauthier, Giorgio Barba Navaretti, and Jaime
DeMelo. 1997. “Firm-Level Response to the CFA Devaluation in
Cameroon.” Journal of African Economies 6(1): 3–34.
UNCTAD (United Nations Conference on Trade and Development). 1998.
Trade and Development Report. Paris.
World Bank. 1994. Adjustment in Africa: Reforms, Results and the Road Ahead.
Part IV
Government Performance from a

Beneficiary Perspective
9
A Quest for Revenue and Tax Incidence

Duanjie Chen, John Matovu, and Ritva Reinikka
One of the main accomplishments of the Ugandan government in the 1990s

was the removal of massive implicit taxation on exports. This chapter as-
sesses how tax policy evolved after export taxation was eliminated, how
the government was able to meet its revenue needs in a less predatory fash-
ion, and how these policies affected households and firms. Because of the
past predatory taxation and prolonged conflict, government revenue was
only 5 percent of gross domestic product (GDP) when Uganda began its
recovery in 1986. Simultaneously, the needs for public spending on social
services and infrastructure were massive to support impoverished house-
holds’ efforts to increase their production, consumption, and welfare, and
to encourage enterprises to invest and diversify. This led policymakers to
pursue a rapid increase in domestic revenue and a corresponding increase
in public services. Rebuilding the government’s revenue base was an es-
sential feature of Uganda’s economic recovery. Institution building for tax
administration resulted in the semiautonomous Uganda Revenue Author-
ity (URA), established in 1991, inspired by Ghana’s example. Because the
URA is not part of the civil service, it can offer higher pay and attract more
qualified staff. Consequently, domestic revenue more than doubled in real
terms during the first half of the 1990s, and by 1996 was 11.3 percent of
GDP (table 9.1).1 In conjunction with large aid inflows, this allowed public
expenditure to grow far more rapidly than GDP (which itself was growing
rapidly) without destabilizing the economy.
1. In Uganda GDP includes the nonmonetary (subsistence) sector. Domestic rev-

enue was 7.6 percent of monetary GDP in 1986 and increased to 15.5 percent of mon-
etary GDP in 1999.
271
Table 9.1. Central Government Revenues, 1991/92–1998/99
Revenue category 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99
U Sh millions
Taxes on income
and profits 23,600 40,900 53,000 77,200 82,600 102,200 124,750 170,040
Excise taxes 15,000 18,800 40,500 50,600 217,000 301,500 304,050 322,870
Petroleum products n.a. n.a. n.a. n.a. 149,900 197,500 188,270 193,210
Other n.a. n.a. n.a. n.a. 67,100 104,000 115,780 129,660
Taxes on goods and
services 55,500 75,100 92,800 153,000 188,700 209,600 247,200 298,600
Value added tax n.a. n.a. n.a. n.a. n.a. 209,600 247,200 298,600
Sales tax 43,400 62,900 75,300 128,700 162,300 n.a. n.a. n.a.
Commercial
272
transaction levy 5,400 9,600 15,300 22,300 25,600 n.a. n.a. n.a.
Other 6,700 2,600 2,200 2,000 800 n.a. n.a. n.a.
Taxes on
international
trade 78,600 124,230 152,500 205,500 100,500 74,800 78,400 96,530
Import duties 76,600 124,230 152,500 176,700 75,900 72,300 78,050 96,480
Export duties
(coffee) 2,000 0 0 28,800 24,600 2,500 350 50
Total tax revenue 172,700 259,030 338,800 486,300 588,800 688,100 754,400 888,040
Total nontax
revenue (fees
and licenses) 13,295 22,404 25,063 40,400 38,400 43,300 47,060 62,700
Total revenue 185,995 281,434 363,863 526,700 627,200 731,400 801,460 950,740
Table 9.1 continued
CPI, annual average
(1991 = 100) 195 253 270 287 308 332 352 351
Real domestic
revenue 95,415 111,075 134,725 183,795 203,612 220,098 227,974 270,866
GDP at factor cost 2,588,800 3,625,938 4,069,439 4,922,397 5,565,388 6,022,953 7,104,303 7,887,246
GDP at market
prices 2,745,491 3,870,388 4,400,270 5,367,456 6,122,089 6,663,235 7,791,426 8,647,425
Monetary GDP at
factor cost 1,794,145 2,481,870 2,890,811 3,619,057 4,213,995 4,717,950 5,467,267 6,119,562
Percentage share of
total domestic
273
revenue
Taxes on income
and profits 12.7 14.5 14.6 14.7 13.2 14.0 15.6 17.9
Excise taxes 8.1 6.7 11.1 9.6 34.6 41.2 37.9 34.0
Petroleum products n.a. n.a. n.a. n.a. 23.9 27.0 23.5 20.3
Other n.a. n.a. n.a. n.a. 10.7 14.2 14.4 13.6
Taxes on goods
and services 29.8 26.7 25.5 29.0 30.1 28.7 30.8 31.4
Value added tax n.a. n.a. n.a. n.a. n.a. 28.7 30.8 31.4
Sales tax 23.3 22.3 20.7 24.4 25.9 n.a. n.a. n.a.
Commercial
transaction levy 2.9 3.4 4.2 4.2 4.1 n.a. n.a. n.a.
Other 3.6 0.9 0.6 0.4 0.1 n.a. n.a. n.a.
Table 9.1 continued
Taxes on
international
trade 42.3 44.1 41.9 39.0 16.0 10.2 9.8 10.2
Import duties 41.2 44.1 41.9 33.5 12.1 9.9 9.7 10.1
Export duties
(coffee) 1.1 0.0 0.0 5.5 3.9 0.3 0.1 0.0
Total tax revenue 92.9 92.0 93.1 92.3 93.9 94.1 94.1 93.4
Total nontax
revenue (fees
and licenses) 7.1 8.0 6.9 7.7 6.1 5.9 5.9 6.6
Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
274
Real change in total
revenue –4.5 16.4 21.3 36.4 10.8 8.1 3.6 18.8
Total revenue as
share of GDP at
factor cost 7.2 7.8 8.9 10.7 11.3 12.1 11.3 12.1
Total revenue as
share of GDP at
market prices 6.8 7.3 8.3 9.8 10.2 11.0 10.3 11.0
Total revenue as
share of monetary
GDP at factor cost 10.4 11.3 12.6 14.6 14.9 15.5 14.7 15.5
CPI Consumer price index.
A Quest for Revenue and Tax Incidence 275
The policy of rapidly increasing public revenue presented a tradeoff for

the economic liberalization program. In particular, it curtailed the scope for
trade reform. The coffee export tax was abolished early on, but tariffs and
other import taxes were retained, initially at a high level because of the quest
for revenue. Even by 1996, import taxes (including petroleum) still accounted
for more than half of total revenue. As argued in chapter 2, the Ugandan
government initially did not recognize the close relationship between export
taxes and import taxes, specifically that import taxes are ultimately borne by
export producers, in particular, coffee farmers. Hence, the switch from ex-
port taxation to import taxation probably achieved less than expected in terms
of export orientation and diversification.
For most of the 1990s the government had an explicit target of increasing
revenue by one percentage point of GDP each year. This target was not backed,
however, by a concrete strategy and administrative measures to encourage
such growth. Over time the government increasingly relied on ad hoc in-
creases in tax rates—particularly fuel taxes—to achieve the revenue target,
without specific knowledge of the supply-side effects. While import tariffs
protected the producers oriented toward the local market, high tax rates gen-
erally encouraged seeking and granting of firm-specific exemptions and tax
holidays, adversely affecting competition. The revenue target was met in the
early 1990s, but since 1996 the recovery has nearly stalled.
The rapid increase in domestic revenue may not have been the best strat-
egy. The corresponding expansion in government expenditure may not have
paid off well at the margin in terms of service delivery (see chapter 11 in this
volume), while the cost of taxation was probably high in terms of bureau-
cratic control and opportunities for corruption (see chapter 10 in this vol-
ume). Thus resource misallocation and foregone private investment likely
undermined growth and the prospects for increasing public revenue in a
more sustainable manner.
As discussed in chapters 2 and 3, Ugandan policymakers have demon-
strated a remarkable ability to readjust economic policy when necessary.
During the second half of the 1990s, import tariffs were reduced consider-
ably and several tax reforms were implemented, including the value added
tax (VAT) and income taxation. Consequently, the tax system is gradually
being transformed from high tax rates and selective incentives toward lower
rates and more standard provisions across the board. The challenges now are
to build a tax culture of compliance and administration that the public per-
ceives as fair and efficient. This chapter takes first a closer look at the policy
of rapidly increasing revenue and recent tax reforms. It then uses household
survey evidence (see appendix A at the end of the book for details) to iden-
tify which taxes are progressive and whether tax reforms helped the poor or
left them worse off. Similarly, it examines business taxation to answer three
questions: What is the actual tax burden on firms’ capital investment and the
overall cost of production across various industries? How does this burden
compare to that in Kenya and Tanzania, which compete for the same foreign
276 Duanjie Chen, John Matovu, and Ritva Reinikka
investment? How does poor compliance and tax administration affect tax
incidence on the enterprise sector?
Revenue Trends and Tax Reforms

In the 1990s, import duties levied on both consumer goods and raw materi-
als accounted for the largest share of central government revenues, reflecting
a policy switch from export to import taxation (table 9.1). The share of im-
port duties reached its highest level of 44 percent in 1992/93. Including sales
tax on imported goods, import taxation has been well over half of total rev-
enues. Subsequent import liberalization produced a more uniform tariff tax
structure and reduced the level and dispersion of tariffs (from 10 to 350 per-
cent in 1992/93 to 0 to 15 percent today for nonregional trade). Petroleum is
the most important taxable item; since 1991/92 it has contributed more than
30 percent of total revenues, including import duty and excise tax. The ad
valorem rate for fuels ranges from 100 percent to more than 200 percent for
paraffin, diesel, and petroleum products, with an estimated weighted aver-
age rate of 174 percent (table A9.6). A high fuel tax is common in many in-
dustrial economies, particularly for environmental reasons. What makes it
problematic in Uganda is that Kenya and Tanzania’s much lower fuel tax
rates result in substantial smuggling (table A9.9).
A tax on coffee exports was reintroduced as a stabilization measure dur-
ing the coffee boom in 1994/95 (see chapter 3 in this volume). A year later,
international coffee prices declined to less than the price threshold set for
the coffee tax. The tax rate of 32 percent above the threshold level was re-
vised to 25 percent in 1995/96, and later abolished. In principle, a coffee tax
could shift forward to buyers of the export good, or it could shift to its
producers in the form of a reduced producer price. Elastic supply of and
inelastic demand for the taxed commodity usually shift the tax to consum-
ers, but with inelastic supply, elastic demand, and a competitive producer
market, the tax burden falls on producers. Small developing countries that
produce primary commodities are usually price-takers internationally.
Hence, even though the coffee stabilization tax was not targeted at coffee
farmers, it did indirectly tax them.
The second largest source of revenue is the VAT, which followed the sales
tax on goods and the commercial transaction levy on services. Introducing
the VAT was regarded as crucial to the government’s longer-term strategy to
broaden the tax base, improve compliance, and increase revenue collection.
By 1991/92, taxes on goods and services constituted 30 percent of total rev-
enues, and have remained at that level since then. The introduction of the
VAT in 1996 was accompanied by a small temporary decrease in its share of
revenue compared with the sales tax, which has since been recovered. While
sales taxes varied considerably by commodity (table A9.1), the VAT has a
single rate of 17 percent. To take into account equity concerns, some goods
considered to have substantial budget shares in the consumption basket of
the lowest income earners were exempted, including unprocessed foodstuffs,

social services, passenger transport services, and fuels.2
Before liberalization, the government instituted a range of tax incentives
in the early 1990s to compensate firms that undertook major investment
projects for prevailing distortions. The 1991 Investment Code included project-
based licensing of large investments. A typical license entitled its holder to a
full or partial income tax holiday and duty exemptions on imported inputs
(see chapter 2 in this volume). As distortions were later reduced by the eco-
nomic liberalization program, the government implemented an income tax
reform in 1997 to streamline the tax incentive system. (Duty-free treatment
of imported capital goods for all firms had been introduced in 1995.) The
objective of the income tax reform was to broaden the tax base, increase ad-
ministrative simplicity, and encourage long-term investment and technol-
ogy transfer. Table A9.6 summarizes key features of the pre- and post-1997
business taxation, including capital taxes, indirect taxes applicable to inputs,
and payroll taxes.3
Finally, the graduated personal tax (GPT) is a major source of locally
raised revenue, although its revenue yield is limited. The legal base of the
GPT is income, but in practice it is an income tax, a wealth tax, or a poll tax,
depending on the district and subject of taxation (Bahl 1997). Because the
threshold is about half the lower threshold of the central government in-
come tax on individuals, the tax is regressive over much of the income scale.4
The GPT is assessed and collected as a presumptive tax on almost all tax
subjects in rural areas and the self-employed in urban areas. In its present
form the GPT represents an expensive form of tax administration and, be-
cause presumptive assessment can imply subjectivity and arbitrariness, is
often perceived as unfair.
2. Excise taxes are of two types: those levied on imports and those levied on
locally produced goods that are often considered as luxury items. The share of
nonpetroleum excise duties in total revenues was only 8.1 percent in 1991/92, and
increased to about 14 percent in 1998/99. Income taxes are composed of the corporate
(profit) tax and pay-as-you-earn personal income tax. The overall contribution of in-
come and profit taxes to revenue remained relatively modest, averaging about 14
percent throughout the 1990s. Only since 1997/98 has this contribution increased
noticeably, likely reflecting the income tax reform of 1997.
3. Investment analysis in chapter 7 relates the probability of a firm to invest and
its investment level to several variables, including firm characteristics, changes in
demand, and profits. Using the same flexible accelerator model of investment, tax
exemptions are added in the regression. They enter negatively but are insignificant.
Hence, despite their important role as policy instrument, tax exemptions do not seem
to explain either the probability that a firm invests or the level of investment of Ugan-
dan firms in 1996–97.
4. In 1997 the GPT had 36 rate brackets, with a specific rate up to a maximum
payment of U Sh 80,000 at the annual income level of U Sh 820,000.
Method and Data for Tax Incidence Analysis

In examining the impact of tax reforms on households, particularly whether
tax reforms have made the poor better or worse off, this chapter applies the
welfare dominance analysis (see annex 9.1). The method is based on the con-
centration curves that measure the fraction of total expenditure on a com-
modity ascribed to different income groups when ordered according to the
level of income or consumption expenditure.5 In this analysis, concentration
curves plot households from poorest to wealthiest on the horizontal axis
against the cumulative proportion of taxes paid by households (figures A9.1
and A9.2). In this method, the more a concentration curve moves away from
the 45-degree straight line, the more progressive is the tax. For one tax to
dominate the other, the difference in their concentration curves must be non-
negative over the whole range of incomes. When the Gini coefficient for a
given tax is greater than the Gini coefficient of per capita expenditure, then
the tax is considered to be progressive. Similarly, the comparison of Gini co-
efficients before and after the tax reforms indicate how the progressivity of
taxation has changed over time (tables A9.2 and A9.3).
Several assumptions are made. The factors that produce the incomes are
assumed to pay the associated direct taxes, while households that consume
the taxed items are assumed to pay the indirect taxes. Thus smokers pay
taxes on tobacco and households that use paraffin pay taxes on paraffin. Im-
port duties are more difficult to capture from a household survey, because of
the lack of differentiation between domestically produced and imported con-
sumer goods. The prices of all goods for which imports compose a large share
of the market are assumed to go up by the amount of the tariff when it is
levied. Finally, most of the analysis relies on statutory tax rates rather than
on any estimates of taxes actually paid.
The data on household expenditures are obtained from the 1992/93 inte-
grated household survey (see appendix A at the end of the book). Table A9.1
shows the various consumer goods and their corresponding tax rates before
and after reforms. Most import duties were reduced considerably by 1995.
This table also shows the various rates of the 1992 sales tax, which was re-
placed by a uniform 17 percent VAT rate in 1996 (some goods are zero-rated).
Uganda uses a different import tariff regime for regional and external trade.
The different tax rates on various products depending on the import source
5. The concentration curve is similar to the Lorenz curve, which is a graphical

presentation of inequality. For the Lorenz curve household expenditures are arranged
in ascending order, and the cumulative share of total expenditures is plotted against
the cumulative share of population. For complete equality the Lorenz curve would
be a straight line; it becomes more curved when inequality rises. The Gini coefficient
is the ratio of the area between the straight line and the Lorenz curve to the total area
under the straight line.
could be identified, but identifying the origin of the imported product con-
sumed by a particular household would be difficult. Therefore, no attempt is
made to calculate import duties based on the countries of import, but the
external regime of import duties is used.
For the tax incidence on firms, the marginal effective tax rate (METR) on
investment and production costs is chosen as the quantitative indicator. The
key assumption underlying the METR concept is that a profit-maximizing
firm invests (or produces) as long as the after tax marginal revenue from its
investment (production) exceeds the marginal cost. While the marginal rev-
enue is not easily observable in practice, data on the marginal cost can be
obtained. For example, when estimating the METR on capital, the marginal
cost is the sum of the financing cost of investment and the economic depre-
ciation rate, adjusted for all relevant taxes and tax allowances. Hence, the
marginal effective tax rate measures the impact of a tax system on an incre-
mental unit of capital investment or business activity (see annex 9.2).6
The METR incorporates the effects of both statutory tax rates and related
tax incentives (such as tax depreciation, tax credit, tax deductibility, and tax
holidays) as well as various industry-specific and economywide factors in-
teracting with these taxes (including financial costs, inflation, and capital struc-
ture). Because of this interaction, the effective tax rate can vary by industry
or tax jurisdictions under the same tax regime. The difference in the METR
across various investors or sectors quantifies the tax bias at the margin and,
other things being equal, indicates how tax policy is likely to affect invest-
ment decisions.
In a low-income country like Uganda where the tax administration is rela-
tively weak, the actual tax incidence is likely to differ from the formal tax
structure. While the analysis can be extended to compare the impact of the
formal tax structure across industries or jurisdictions, obtaining adequate
information about actual administrative practices and detailed industrial
parameters is more difficult. Thus the issue is not so much whether the METR
method can handle the real world, but how well analysts understand the real
world and are able to quantify the differences between the formal tax struc-
ture and actual tax collection. Although the analysis presented in this chap-
ter is based on Uganda’s formal tax system, it uses actual firm-level data for
key nontax parameters (see appendix B at the end of the book). The capital
structure by industry was obtained from the URA taxpayer database, while
the cost structure by industry was estimated from 1992 input-output tables
6. For example, if the gross-of-tax rate of return to capital is 15 percent and the
net-of-tax rate of return is 12 percent, the marginal effective tax rate on capital is 25
percent if the after tax return is used as the denominator, or 20 percent if the before
tax return is the denominator. This study uses the former convention, as it is more
convenient when calculating the METR on the cost of production.
(Republic of Uganda 1995). Firm survey evidence is also used to explore the
effect of compliance and tax administration on the METR.
Tax Incidence on Households

This section presents the tax incidence analysis on households both before
and after tax reforms. It first explores the extent to which the overall tax sys-
tem is progressive or regressive. To determine this, all the taxes paid by the
household are aggregated and the (extended) Gini coefficients of the aggre-
gate taxes are compared with those of total household expenditure. The re-
sults presented in table A9.2 indicate that, by and large, the tax structure was
progressive before reforms. Concentration curves for the main tax categories
shown in figure A9.1 confirm this. Most individual tax categories were also
found to be progressive before reforms, with the exception of the excise tax
and the graduated personal tax. In particular, the excise tax on paraffin—
which is heavily consumed by the poor—was highly regressive. By attach-
ing a higher weight to commodities consumed by the poor (parameter v in
tables A9.2 and A9.3), excise taxes on paraffin became even more regressive.
Pay-as-you-earn was the most progressive tax. This tax is levied on formal
sector employees and hence tends to be concentrated among the better-off.
Because the minimum threshold to be liable for this tax is relatively high, it
exempts the lowest income groups. Import taxes were the second most pro-
gressive category, followed by the sales tax.
The incidence analysis shows that after reforms, the overall tax system
remained progressive (table A9.3). The results are consistent with findings of
similar studies on Ghana and Madagascar (Younger 1996; Younger and oth-
ers 1999). The Gini coefficients before and after reforms confirm that substi-
tution of the VAT for the sales tax does not necessarily worsen the welfare of
the poor (tables A9.2 and A9.3).7 The pay-as-you-earn tax remains the most
progressive tax after reforms. However, determining conclusively which of
the other taxes (VAT, import tax, and excise tax) dominates after the reforms
is not possible.
Some important changes in the Gini coefficients occurred after the tax re-
forms (table A9.3). The coefficient of the aggregate excise taxes shows that these
taxes were made more progressive by the reform. Import duties, however, be-
came more regressive. The Gini coefficient of the coffee stabilization tax is con-
siderably below that of other taxes, implying that an export tax on a primary
commodity can be highly regressive. The burden lies heavily on rural produc-
ers as exporters shift the tax to them. As confirmed by the test statistic (table
A9.5), the coffee stabilization tax dominates all other taxes.
7. While the results show that the VAT is a progressive tax, it is inconclusive
from the welfare dominance test whether the VAT is much more progressive than a
sales tax (tables A9.4–A9.5).
To raise public revenue, petroleum products have been heavily relied on,
as their demand is considered inelastic. Applying the statutory tax rates di-
rectly to petroleum consumption shows that petroleum taxes (apart from
those on paraffin) are very progressive. This incidence analysis, however,
ignores the indirect or intermediate effects of petroleum taxation on the other
sectors. These indirect price effects of petroleum taxes can be obtained from
the input-output table and assigned to the corresponding commodities in
the household survey (Republic of Uganda 1995). Two types of taxes are con-
sidered. First, import duties levied on petroleum products are imputed on
all other sectors. Second, the excise tax has a strong effect on prices in the
transport sector. When these effects are taken into account, petroleum taxes
are no longer as progressive as in the initial analysis.8
Marginal Effective Tax Rate for Firms

This section covers estimates of the METR on capital and cost of production
for Ugandan firms operating in commercial agriculture, agroprocessing,
manufacturing, construction, transportation, communication, and tourism.
The METR on capital includes four types of assets (buildings, machinery,
inventories, and land), two different tax regimes (the pre- and post-1997 tax
system), and three tax codes (regular taxable, tax holiday, and small firms).
Various policy options are also simulated.9 The METR estimation on the cost
of production includes three key inputs: capital, labor, and fuel.
The estimation of the METR is not only sensitive to tax policy, but also to
the choice of nontax parameters, such as macroeconomic indicators and
industry-specific parameters. These include inflation rate, interest rate, debt-
to-assets ratio, economic depreciation rate, capital structure, and cost struc-
ture (table A9.7). While inflation and the interest rate are usually the same for
all industries within an economy, the other parameters vary by sector. De-
preciable assets used by different industries can have a different useful life
and replacement cost, which results in a different economic depreciation rate.
Capital structures also vary by industry. Compared with tourism, for example,
the capital structure in manufacturing is more intensive in machinery and
inventories and less intensive in buildings.10
8. While the excise tax on gasoline—without taking into account indirect effects
on other sectors—gives progressive Gini coefficients of 0.899 to 0.992 (for v = 2, 4, 6, 8,
10), taking into account indirect effects on other sectors yields less progressive results
of 0.436 to 0.726 for the same values of v. The higher the value of the parameter v, the
higher weight is attached to goods consumed by the poor.
9. Overall, the discussion focuses on large and medium-size firms (firms that
have more than 20 employees): small firms are discussed as a special case.
10. Chen and Reinikka (1999) provide a discussion on nontax parameters as well
as sensitivity analyses for the base case assumptions.
METR on Capital
Capital investment generally involves two categories of capital, depreciable
and nondepreciable assets. These categories can be further divided into build-
ings and machinery (depreciable), and inventory and land (nondepreciable).
Capital taxes in Uganda are summarized in box 9.1. As mentioned earlier,
Box 9.1. Capital Taxes
Capital taxes include company income tax (and related tax allowances), per-
sonal income taxes on investment income, presumptive tax on small businesses,
municipal property taxes, and import duties applicable to capital goods. The
company income tax is 30 percent. Firms are allowed to carry over their operat-
ing losses indefinitely, except for those firms that enjoy a tax holiday. Two types
of deductions from the company income tax are allowed: the initial investment
allowance and the annual depreciation allowance. Investment in machinery
and plant is strongly encouraged through tax incentives; such investment is
entitled to both the initial allowance and the annual depreciation allowance
available to all taxable firms.
The initial allowance for investment in machinery and plant (except for
vehicles) is 50 percent in five main industrial locations—Kampala, Entebbe,
Namanve, Jinja, and Njeru—and 75 percent elsewhere in Uganda. The annual
depreciation rate is 40, 35, 30, and 20 percent for the four different classes of
machinery and plant, respectively. For industrial buildings, there is no initial
allowance, and the annual depreciation rate is much smaller (5 percent) than
for machinery. However, expenditures on acquiring farm structures are entitled
to a higher annual depreciation allowance of 20 percent. Before the 1997 tax
reform, the annual depreciation rate for structures was 4 percent, while ma-
chinery and plant were divided into three classes, with the annual deprecia-
tion rate at 50, 40, and 20 percent, respectively. The classification of machinery
was also changed significantly in 1997.
Before the income tax reform, a holder of the certificate of investment incen-
tives was exempted from company income tax, withholding tax, and tax on
dividends for a certain period, depending on the total value of the investment.
New tax holidays were repealed in 1997, and interest and dividends are both
taxed at 15 percent. A presumptive tax on small businesses was introduced in
1997, while previously most small firms had no tax obligations. Instead of pay-
ing a regular income tax, a small firm with annual turnover below U Sh 50 mil-
lion is subject to a presumptive tax up to 1 percent of its gross turnover, unless it
opts to file the regular income tax return. This tax is final and no deductions for
capital expenditure or other business expenses are allowed. Finally, municipali-
ties impose a property tax on immovable property or buildings, but not on va-
cant land. For example, in Kampala the property tax rate is 10 percent on the
ratable value, which is obtained by deducting maintenance cost from the gross
value, or the rent one may expect to receive from the property.
capital investment by asset type varies by industry. Consequently, even if a

certain type of asset incurs the same METR, the different capital structure by
industry will result in a different aggregate METR on capital across indus-
tries. The cost structure by input varies also by industry.
ASSET TYPE. The base case is the 1997 regular taxable firm. As table 9.2 shows,
machinery is the lowest taxed asset in Uganda. This is mainly because of the
generous initial allowance of 50 percent, along with the annual depreciation
allowance that begins the first year. In fact, the METR on machinery is nega-
tive in several industries, which indicates a tax subsidy.11 The transportation
sector, however, incurs a relatively high METR of 17 percent on machinery,
mainly because vehicles are not eligible for the initial allowance.
Inventories are the highest taxed asset, with an METR of 45 percent.
This is mainly because of the first-in-first-out (FIFO) accounting method
used by most Ugandan firms, combined with a positive inflation rate. Build-
ings, except those used by commercial agriculture, are taxed the second
highest (an METR of more than 40 percent), mainly because of the local
property tax on buildings, combined with less generous tax depreciation
allowances. Because of a more generous depreciation allowance for farm
works, buildings used in commercial agriculture bear a low tax burden (an
METR of 12 percent. Structures used by the construction industry incur a
higher METR than other sectors, mainly because of a higher economic de-
preciation rate. Finally, nonfarm land is also subject to the local property
tax, resulting in a relatively high METR (42 percent), while farmland incurs
a significantly lower METR (28 percent).
As shown in table 9.2, while nondepreciable assets such as inventories
and land are taxed at the same level across industries, depreciable assets,
such as buildings and machinery, are taxed unevenly. This is because depre-
ciable assets used by different industries have different useful lives and dif-
ferent tax depreciation allowances. For a given depreciable asset, the wider
the gap between the economic and tax depreciation rate, the higher the METR.
INDUSTRIES. The aggregate METR for each industry is simply a propor-

tional difference between the weighted average of the before tax and after
tax rate of return by asset, based on the industry-specific capital structure.
Obviously, the larger the share of the assets that are highly taxed, the higher
the industry’s aggregate METR. As shown in table 9.2, tourism incurs the
highest METR (39 percent) in the base case. This is mainly a result of its
high capital weight in buildings, the second highest taxed asset. Manufac-
turing incurs the second highest METR (33 percent), mainly because the
11. As a firm is taxed as a whole rather than by asset type or at the margin, this
tax subsidy on machinery can be thought of as reducing the tax on income generated
by other type of investment.
Table 9.2. Marginal Effective Tax Rate on Capital for Ugandan Firms
(percent)
Commercial
Category agriculture Agroprocessing Manufacturing Construction Transportation Communications Tourism
Regular taxable case, 1997

(interindustry dispersion: 3.9)
Buildings 11.7 43.4 44.3 48.4 42.7 44.9 43.0
Machinery –0.3 0.6 1.4 –0.4 16.6 –1.1 2.9
Inventory 45.2 45.2 45.2 45.2 45.2 45.2 45.2
Land 27.5 41.7 41.7 41.7 41.7 41.7 41.7
284
Aggregate 26.2 23.2 32.9 23.5 20.9 31.0 39.2
Regular taxable case, pre-1997
Buildings 30.4 46.5 47.6 51.9 45.9 48.2 46.2
Machinery 20.4 29.9 32.9 21.0 25.5 32.6 30.4
Inventory 45.2 45.2 45.2 45.2 45.2 45.2 45.2
Land 27.5 41.7 41.7 41.7 41.7 41.7 41.7
Aggregate 32.3 38.1 42.5 34.1 28.7 42.8 43.9
Difference from the 1997
regular taxable case 6.1 14.9 9.6 10.6 7.8 11.9 4.7

Table 9.2 continued
Commercial
Tax-holiday case, pre-1997

Buildings 15.8 28.5 29.0 31.1 28.2 32.1 28.4
285
Machinery 26.7 25.3 26.6 25.6 27.6 31.5 28.7
Inventory 15.3 12.8 12.8 12.8 12.8 15.3 12.8
Land 8.0 18.2 18.2 18.2 18.2 20.0 18.2
Aggregate 15.0 23.6 22.3 21.0 26.9 30.2 26.3
regular taxable case –11.2 0.4 –10.6 –2.5 6.0 –0.7 –12.9
Source: Authors’ calculations based on data provided by the Ministry of Finance, Planning, and Economic Development and the URA.
sector invests about two-thirds of its total capital in the two highest taxed
assets, inventories and buildings.
In contrast, transportation enjoys the lowest METR on capital of all sec-
tors (21 percent). The primary reason is its heavy capital weight in machin-
ery, particularly vehicles which have a relatively high annual depreciation
allowance (30 percent). For the same reason, agroprocessing and construc-
tion incur a relatively low METR (23 and 24 percent, respectively). The METR
on capital for commercial agriculture and the communications industry are
in the middle (with METRs of 26 and 31 percent, respectively). Agriculture
has a high capital share in inventories, while communications has a high
capital share in buildings.
SMALL FIRMS. Small firms do not pay regular income taxes unless they opt to
do so, but are instead levied a presumptive tax up to 1 percent of their gross
turnover. Here, small firms refers to firms qualifying for and choosing to pay
the presumptive tax. Because the presumptive tax is imposed on the gross re-
ceipts without any adjustments, small firms are neither entitled to the generous
initial allowance for investment in machinery nor subject to any restrictions on
writing off business expenditure. Consequently, the METR for small firms is
lower than for large and medium-size regular taxable firms on all other assets
but machinery (table A9.8). However, unless engaged in commercial agricul-
ture, small firms still pay municipal property taxes. Therefore, buildings and
land are taxed higher than investment in machinery and inventory by small
firms. As depreciable assets wear off at a different pace from industry to indus-
try, buildings and machinery incur a different METR across industries, despite
being subject to the same presumptive tax rate and having no differentiated
sector-specific tax allowances. Compared with the base case (regular taxable
firm) by industry, small firms are taxed significantly less as measured by the
aggregate METR on capital. The gap ranges from 15 percentage points in
agroprocessing to more than 24 in manufacturing. Furthermore, the interindus-
try dispersion is smaller than in the base case of the regular taxable firm.
Impact of Tax Reform

This section examines the impact of income tax reforms on regular taxable
firms and compares them with the firms that had been granted tax holidays.
REGULAR TAXABLE FIRMS. As shown in table 9.2, the tax burden incurred by
large and medium-size regular taxable firms was significantly reduced follow-
ing the 1997 income tax reform. The difference in the aggregate METR between
the two systems is 5 to 15 percentage points. The most striking change is the
difference in the METR on machinery, varying from 9 percentage points for
transportation to 34 percentage points for the communications sector. This is
mainly because of the generous initial allowance for investment in machinery
and equipment available to all tax paying firms under the new system. The
other contributor is the zero-rated import duty for imported machinery.
Following the reform, the METR on buildings declined about three per-
centage points, mainly because the annual depreciation allowance increased
from 4 to 5 percent. The wider gap (about 19 percentage points) for commer-
cial agriculture reflects a higher annual allowance for farm works. The METR
for inventory and land did not change.
REGULAR TAXABLE VERSUS TAX HOLIDAY FIRM. Corporate tax holidays were abol-
ished in 1997 and replaced mainly by an initial investment allowance for ma-
chinery. Consequently, the METR on machinery was reduced approximately
25 percentage points across industries, except in transportation. This indicates
that, given the generous allowances, profitable firms that invest heavily in
machinery can benefit from opting out from the tax holiday status. For all other
assets, however, the METR was lower under the tax holiday regime.12
Those investing heavily in machinery gained most from the tax reform,
reflecting the policymakers’ desire to provide incentives for acquiring new
technologies. The most evident example is the transportation industry, where
the advantage measured by the METR for regular taxable firms over their
tax holiday counterparts is 6 percentage points. However, the METR for the
regular taxable firms in the tourism sector is 13 percentage points more than
their tax holiday counterparts, because of the high capital share in structures.
Similarly, commercial agriculture and manufacturing incur a higher METR
(11 percentage points) under the new system, as these industries invest more
in nondepreciable assets, particularly inventories for which the tax holiday
regime was more advantageous.13
METR on Cost Production

The METR on cost of production is used to evaluate the impact of all busi-
ness taxes—including capital, payroll, and indirect taxes—on overall busi-
ness activities. It is estimated as an integration of the METR on various in-
puts, using the augmented Cobb-Douglas production function (see annex
9.2). As fuel tax is an important revenue source in Uganda, motor fuel—along
with capital and labor—is included as an input for production.14 As shown in
12. As can be seen from table 9.2, interindustry tax distortion increased following
the tax reform (see annex 9.2 for definition). Further analysis shows that the main
contributor was the difference in the METR between commercial agriculture and all
other sectors. As farm works are entitled to a fast write-off and properties used for
commercial agriculture are exempt from municipal property tax, buildings and land
are taxed much less than in the other sectors.
13. Chen and Reinikka (1999) provide policy simulations and sensitivity analy-
ses for nontax parameters, including choice of accounting method, initial allowance
for buildings, municipal property tax on small firms, inflation rate, debt-to-assets
ratio, and economic depreciation rate.
14. The combined fuel tax rate for Uganda is the ad valorem rate on the total cost,
insurance, and freight destination warehouse cost, including all handling charges. The
table 9.3, the cost structure varies across industries. Capital accounts for the
largest share, which probably reflects the low labor costs in Uganda. Further-
more, as agroprocessing requires a higher share of transportation services
than commercial agriculture, the share of fuel in its total cost is 9 percent,
while it is only 1 percent in commercial agriculture.
Table 9.3 summarizes the METR on each of the three inputs as well as on
the overall cost of production by industry. The METR on capital uses the base
case (regular taxable firm under the 1997 tax system), the METR on labor is
the statutory payroll tax rate of 10 percent, and the METR on fuel is estimated
at 174 percent (table A9.6).15 As the METR on fuel is significantly higher than
on capital, industries that use more fuel incur a higher METR on production
cost than on capital alone. Agroprocessing and transportation, with the low-
est METR on capital, fall in that category. In other words, the high fuel tax
may actually negate some of the benefits of the tax reform—which strongly
encourages investment in machinery and equipment in agroprocessing and
the transportation sector—as these two sectors spend the most on fuel. In
contrast, all other industries incur a lower METR on production cost than on
capital, mainly because of the low METR on labor and the small share of fuel
in the total cost. As concerns the cost of production, tourism and manufactur-
ing are still the highest taxed industries in Uganda, while construction re-
places transportation as the lowest taxed industry.
Cross-Border Comparison for Foreign Firms

This section compares the impact of taxation on foreign direct investment in
Kenya, Tanzania, and Uganda. It attempts to determine which of the three
countries could best attract foreign investors, if tax cost were the only decid-
ing factor. Manufacturing and tourism are the focus, as these are key areas
for foreign direct investment in Eastern Africa. For simplicity, tax provisions
and economic parameters for foreign firms are based on the United Kingdom’s
tax system, which accounts for the largest share (about 25 percent) of the
total actual foreign investment in Uganda.
Cross-Border Comparison of METR on Capital

Tax rates and provisions for Kenya and Tanzania are summarized in table
A9.9. To focus the cross-country comparison exclusively on the burden of
taxation, Uganda’s nontax parameters and capital structure are also applied
weighted average rate is based on data provided by the URA on fuel sales by product
in 1997.
15. As the payroll tax in Uganda is imposed on the total payroll without ceilings,
the statutory payroll tax rate can be seen as the marginal rate. Ignoring the shift effect
assumes that the employer’s share of payroll tax is fully borne by the employer.
Table 9.3. Marginal Effective Tax Rate on Cost of Production for Ugandan Firms
(percent)
Commercial
Factor of production agriculture Agroprocessing Manufacturing Construction Transportation Communications Tourism
METRa
Capital 26.2 23.2 32.9 23.5 20.9 31.0 39.2
Labor 10.0 10.0 10.0 10.0 10.0 10.0 10.0
Fuel 174.0 174.0 174.0 174.0 174.0 174.0 174.0
289
Aggregate 25.8 26.7 30.6 21.1 24.3 25.5 34.2
Cost structureb
Capital 89.2 52.2 66.8 50.2 67.1 60.4 68.8
Labor 9.5 38.8 28.2 45.6 26.4 36.7 27.2
Fuel 1.3 9.0 5.0 4.2 6.4 2.9 4.0
a. METR by input and on overall cost of production.

b. Input share in total cost of production (excluding other inputs).
Source: Authors’ calculations based on data provided by the Ministry of Finance, Planning, and Economic Development and the Uganda Revenue Authority;
Republic of Uganda (1995) for cost structure.
to Kenya and Tanzania.16 With these assumptions, Uganda has a tax disad-
vantage compared with Kenya in both manufacturing and tourism, mainly
because of Kenya’s preferential tax treatment targeted to these two sectors
(table 9.4). In tourism, Uganda is also less competitive than Tanzania in terms
of taxation, mainly because of its local property tax on buildings, which ac-
counts for 71 percent of capital in the tourism sector.
Various factors contribute to this outcome, including the following:
• Kenya and Tanzania have no property tax on structures. Consequently,
even without considering the initial investment allowances available
in Kenya, buildings are taxed significantly less in Kenya and Tanza-
nia.17 A slightly more generous tax depreciation rate for buildings in
the tourism sector (6 percent versus 5 percent) also contributes to a
lower METR on buildings in Tanzania.
• Kenya provides an initial investment allowance of 60 percent for both
buildings and machinery for manufacturing and tourism. Therefore,
despite Kenya’s slightly higher corporate income tax rate, buildings
are taxed much more lightly than in Uganda and Tanzania.
Table 9.4. Marginal Effective Tax Rate on Capital for Foreign Firms
(percent)
Factor of production Uganda Kenya Tanzania

Manufacturing
Buildings 38.9 1.9 25.6
Machinery –3.9 12.3 31.0
Inventory 59.0 69.0 61.9
Land 32.8 27.5 39.0
Aggregate 33.8 28.8 40.0
Tourism
Buildings 36.5 0.9 15.9
Machinery –1.8 10.0 28.5
Inventory 59.0 69.0 61.9
Land 32.8 27.5 39.0
Aggregate 32.6 7.5 21.9
Note: Uganda’s nontax parameters are applied to Kenya and Tanzania.
Source: Authors’ calculations based on data provided by the Uganda Revenue Authority; Ministry
of Finance, Planning, and Economic Development; Bureau of Statistics; and the World Bank.
16. A simulation using country-specific parameters is carried out in Chen and

Reinikka (1999).
17. Should buildings also be exempted from the municipal property tax in Uganda,
Uganda could gain a tax advantage over Kenya and Tanzania in manufacturing and
over Tanzania in tourism.
• A nonzero import duty on most machinery imported to Kenya and

Tanzania contributes significantly to higher METRs on machinery in
these two countries.
• The different property tax rates on land affect the METR on land: Tan-
zania, at 39 percent, has the highest METR on land, followed by Uganda
with 33 percent and Kenya with 28 percent.
Cross-Border Comparison of Cost of Production

Again, to isolate the impact of taxation, Uganda’s nontax parameters, in-
cluding the cost structure, are applied to Kenya and Tanzania. As before, the
METR on labor is the average payroll tax payable by employers, and the
METR on fuel is the effective average tax rate on motor fuels. As shown in
table 9.5, Kenya has the lowest METR on labor, followed by Tanzania (0.1
and 4 percent, respectively, compared with 10 percent in Uganda). Tanzania
has the lowest METR on fuel, followed by Kenya (26 and 64 percent, respec-
tively, compared with 174 percent in Uganda).18 As a result, measured on
cost of production, Uganda becomes the highest taxed country in both manu-
facturing and tourism. Tanzania’s tax competitiveness in tourism becomes
Table 9.5. Marginal Effective Tax Rate on Cost of Production for

Foreign Firms
(percent)
Factor of production Uganda Kenya Tanzania

Manufacturing
Capital 33.8 28.8 40.0
Labor 10.0 0.1 4.0
Fuel 174.0 62.0 25.4
Overall 30.7 21.5 28.8
Tourism
Capital 32.6 7.5 21.9
Labor 10.0 0.1 4.0
Fuel 174.0 62 25.4
Overall 29.9 7.2 17.0
Note: Uganda’s nontax parameters are applied to Kenya and Tanzania.
Source: Authors’ calculations based on data provided by the Uganda Revenue Authority;
Ministry of Finance, Planning, and Economic Development; Bureau of Statistics; the Uganda
Investment Authority; and the World Bank.
18. For Kenya and Tanzania, the fuel tax rate by product is estimated based on
the tax and the price per liter, while Uganda’s shares of various products in total sales
were used as weights to estimate the combined fuel tax rate.
more evident, while its manufacturing sector now has a lower tax burden
than its counterpart in Uganda. Kenya has an even greater tax advantage
over Uganda in both sectors.
Compliance and Tax Administration

A typical tax incidence analysis assesses the tax structure without dealing with
administrative realities. Administration, however, can create major distortions
in even a well-designed tax system if it is not managed efficiently and fairly.
This section examines key features of taxpayer compliance and tax adminis-
tration, based on firm survey evidence (see appendix B at the end of the book).
The purpose is to isolate factors likely to change the true tax burden on firms
from what the formal system and the METR analysis indicate.
Tax Compliance
Taxpayer compliance depends on economic incentives embedded in the tax
structure and the effectiveness in detecting and penalizing noncompliance (see
Das-Gupta and Mookherjee 1998). According to the 1998 firm survey, a third
of Ugandan firms were in a tax loss position in 1997, that is, they neither paid
the corporate income tax nor had a tax holiday (table A9.10). While this esti-
mate may appear high, this ratio is not out of line with international experi-
ence. For example, Canadian statistics show that an average of more than 40
percent of active nonfinancial firms are in a tax loss position. Twenty-six per-
cent of Ugandan firms did not pay the VAT in 1997, possibly because many
smaller firms are not registered for the VAT. Commercial agriculture has the
largest share of non-VAT paying firms. This is broadly consistent with the de-
sign of the VAT system (for instance, foods are zero-rated in general). Eight
percent of Ugandan firms with five or more employees do not pay taxes.
Whether or not firms are content with their own level of taxes, their own-
ers clearly feel disadvantaged when they see their competitors escaping taxa-
tion. In the 1994 survey of Ugandan firms, respondents identified competi-
tors’ evasion of taxes as a major constraint (World Bank 1994). Some 60 percent
of firms reported that they faced unfair competition. Furthermore, firms esti-
mated the informal economy (part of the economy evading taxes, duties, or
laws and regulations) to be as high as 43 percent. In 1998 this perception
remained, with tax evasion considered the leading constraint from unfair
competition. However, the numerical constraint scores for competitors smug-
gling or evading taxes have declined.
Despite some improvement in perceptions, the legacy of a predatory
state, coupled with limited improvement in service delivery, continues to
adversely affect tax compliance in Uganda. In the 1998 survey, firms in
manufacturing—the second highest taxed sector measured by the METR—
estimated that half of their competitors gain an advantage through tax eva-
sion. In construction and agroprocessing, the reported share was about 40
percent. In tourism, the highest taxed sector as measured by the METR,

firms reported that a third of their competitors evade taxes. In commercial
agriculture, however, where the share of tax paying firms is the lowest,
only 5 percent of competitors were perceived to evade taxes.
Tax Administration
A prominent feature of the Ugandan tax administration is frequent tax au-
dits, which are either desk or field operations or a mixture of both. Predeter-
mined criteria do not exist for conducting an audit, but factors such as com-
pliance record, quality of returns submitted, and size of firm are considered
important. Sixty-eight percent of all firms were audited either for the corpo-
rate income tax, VAT, or both during 1995–97. Forty-one percent of firms re-
ported that they were audited for the corporate income tax, while as many as
60 percent of all firms were audited for the VAT. The latter is equivalent to
three-quarters of the VAT-paying firms. In the international comparison,
Uganda’s audit figures are extremely high. For example, in Canada all large
corporations (about 1,000) are audited, and the remaining 13,000 or so corpo-
rations face audit rates of 5 percent or less. The high auditing frequency indi-
cates a serious lack of voluntary compliance and a low level of mutual trust
between the tax authority and the taxpayer.
The URA routinely “assesses” tax returns submitted by taxpayers. These
assessments are typically desk reviews of self-declarations and supporting
documents. The tax officer may accept the taxpayer’s declaration as is, or
“assess” an additional tax to be paid. A tax audit may also be involved that
may lead to a demand for additional taxes to be paid as an “assessment.” As
shown in table A9.10, as many as 51 percent of Ugandan firms disagreed
with the URA on their assessment during 1995–97. Sixty-eight percent of these
cases were resolved through negotiation between the firm and URA officers,
while 10 percent appealed to a third party. None of the disputes was taken to
court. The rest remained unsettled at the time of the survey. At the end, roughly
a third of the resolved disputes ended with a result closer to the taxpayer’s
own assessment, a third were closer to the URA’s assessment, and the rest
were between the two assessments. Depreciation allowances appear to be
one of the main causes for disputes in the corporate income tax assessments.
The firm survey also indicates that most tax holiday firms have little or no
involvement with the tax authority, which may be an additional incentive
for initially acquiring tax holiday status.
The Impact on the METR

The firm survey reveals important differences between the formal tax sys-
tem and actual practice, which can affect the METR results presented here.
First, among the firms that were audited, at least every third firm had to pay
additional taxes, while every fourth firm incurred additional costs, such as
bribes (see chapter 10 in this volume). All firms whose tax assessment dif-
fered by 100 percent or more “always” (five on the scale of one to five) had to
pay bribes to URA officials, while on average, all survey firms reported that
bribes were “seldom” required (two on the scale of one to five). Bribes may
affect the effective tax burden in two ways. On the one hand, despite being a
cost, bribes can reduce the tax burden (measured by the METR) if they pro-
vide an opportunity for tax evasion. On the other hand, the extra costs may
increase the tax burden when used, say, to avoid a lengthy appeal and settle-
ment process (which in itself would increase the burden, but is not captured
by the METR based on the formal tax system).
Second, as the VAT is a consumption tax and therefore should not affect
capital investment and taxable business activities, the METR model gener-
ally ignores it. However, if the input tax credit under the VAT system is not
refunded quickly or not at all, then VAT can place an additional tax burden
on the business sector.19 As the VAT was introduced in Uganda only in 1996,
implementation problems can be expected to arise. In 1998 the main com-
plaint from the business sector concerned refunding the input VAT credit. As
table A9.10 shows, 81 percent of firms purchase inputs from VAT-registered
suppliers but only 56 percent of these firms claim input tax credits. Whether
this results from the VAT credit and liability offset procedure is not clear.20
Another potential reason is that firms with excess input tax credits decline to
claim for refunds, for example, because of higher compliance costs. This could
be tempting for firms that can pass on the input VAT cost to consumers, but
less for the firms that have to absorb the cost themselves. In the former case,
the VAT would cascade and increase tax revenue in the short term, but at the
cost of consumer welfare in the long run. In the latter case, firms may incur a
profit loss that can affect the corporate income tax revenue in turn.
Fifty-two percent of the firms that claimed an input tax refund received
their expected amount in 1998. However, a significant portion (18 percent)
of firms that claimed the input tax credit did not receive any refund, while
the rest (40 percent) received a partial refund. Furthermore, the waiting
period for even a partial refund of the input VAT credit can be lengthy. Of
the firms that received at least a partial refund, more than half waited more
than six weeks, while 10 percent waited more than six months. The lengthy
process for input VAT refund is likely to curb compliance as well as in-
crease the cost of doing business. It ties up a considerable portion of
19. When the input tax credit is not refunded, the VAT could be modeled as a
sales tax on capital or any other taxable input. In the case where the refund period is
abnormally long and no interest is paid by the revenue authority, the interest cost
could be modeled as an increment on the cost of financing.
20. When offset procedures are being used, apparently no supporting documenta-
tion is required and the approval is granted after a desk review, subject to a later audit.
However, such a loose arrangement can cause major difficulties at the audit stage.
working capital that has a high opportunity cost, considering a bank lend-
ing rate of more than 20 percent.
Hence, two types of opposing factors emerge from the survey evidence
that could alter the METR results. First, tax evasion would reduce the actual
METRs compared with the formal tax system. Because compliance is firm
specific and tax administration also tends to treat firms differently, this im-
pact is not the same across industries, or even within a particular sector. Sec-
ond, delays in the VAT refunds and payment of bribes could have the oppo-
site effect of increasing the tax burden compared with the formal tax system.
The net effect is ambiguous. Similarly, the impact of frequent tax audits and
assessments on the METR is also ambiguous, depending on whether these
contribute to enforcement of the formal rules or cause an extra cost to firms.
Conclusions
The National Resistance Movement government rescinded predatory implicit
and explicit taxation on exports in the early 1990s, one of the major accom-
plishment in Uganda’s recovery. However, whether the rapid increase in do-
mestic revenue was a good strategy is less clear. The corresponding expansion
in government expenditure may not, at the margin, have had a high payoff in
terms of service delivery, while the cost of taxation was high because of bu-
reaucratic control, resource misallocation, and foregone household consump-
tion and private investment. These effects were likely to undermine growth,
and hence the prospects for sustainable increases in public revenue.
Ugandan policymakers, however, have been able to readjust their eco-
nomic policy when necessary. During the second half of the 1990s, once it
became obvious that import taxes were an implicit tax on exports, these taxes
were considerably reduced and several other tax reforms were introduced,
including the VAT and income taxation. Consequently, the Ugandan tax sys-
tem is gradually being transformed from high tax rates and selective incen-
tives and exemptions toward lower rates and more standard provisions.
Household survey analysis reveals that tax reforms implemented in the
1990s were generally propoor. First, given the zero rating of goods consumed
by the poor, replacing the sales tax with the VAT did not lead to the poor
being worse off. Second, import taxation remained progressive after tax re-
forms, but less so. In aggregate, excise taxes became more progressive. Third,
increased taxation on paraffin is highly regressive, while taxes on other pe-
troleum products are progressive. Fourth, given the liberalized market, ex-
port taxes on coffee used during commodity booms tend to hurt the poor.
The METR analysis demonstrates that—even when the country’s level
of public revenue is low at the macroeconomic level—rapidly increasing
taxation may constrain private investment at the microeconomic level, for
two reasons. First, the formal enterprise sector in these economies typically
represents a small share of output, but a high proportion of the effective tax
base. Second, access to credit is limited and interest rates are high,
particularly for smaller firms, and hence most private investment is financed
by profits and personal savings. Consequently, taxation reduces both the
expected revenue from a given investment project and the availability of
investment finance.
From the perspective of foreign investors, Uganda appears to have higher
taxes than neighboring countries, particularly Kenya. Raising nominal tax
rates is therefore no longer a feasible policy option for Uganda. At the
microeconomic level, the Kenyan tax system appears to place the lowest bur-
den on firms investing in manufacturing and tourism. However, at the mac-
roeconomic level, Kenya’s share of tax revenue in GDP is the highest of the
three countries. Uganda’s tax disadvantage results mainly from a property
tax on buildings, which does not exist in Kenya and Tanzania, and its signifi-
cantly higher fuel taxation. A strong case exists for harmonization of fuel
taxes within the region.
To level the playing field, discretionary corporate tax holidays were abol-
ished in 1997 in Uganda and replaced by an initial investment allowance for
machinery for all firms. Consequently, the METR on machinery was signifi-
cantly reduced. The analysis indicates that profitable firms that invest heavily
in machinery clearly benefited from this policy change. However, for all other
assets the METR was lower under the tax holiday regime.
The METR estimates reflect the formal tax structure. Tax administration,
if not fair and efficient, can distort the best intentions of policymakers and
produce a very different outcome in terms of the actual tax burden firms
face. Using firm survey evidence, several factors that can alter the METR
results were identified. First, widespread tax evasion and firm-specific ex-
emptions—which show up strongly in the 1997 data despite efforts to curb
them in prior years—are likely to reduce the METRs. Second, delays in VAT
refunds and payment of bribes are likely to have the opposite effect of in-
creasing the METR compared with the formal tax system. However, the net
effect is ambiguous.
Tax administration is an important area to be tackled in Uganda in the
future. In particular, efforts to combat corruption and mechanisms to resolve
grievances between the business sector and the tax authority are critical. These
efforts require regular dialogue with the private sector to build trust, and tax
education and training for both taxpayers and administration staff.
Annex 9.1. Household Incidence Analysis and the Concept of

Welfare Dominance
The theoretical model used in this chapter for the household incidence analysis
of tax reforms relies on the work of Yitzhaki and Slemrod (1991). In this model,
for any social welfare function favoring equitable distribution of income, a
marginal reduction in taxes on, say, good xs and a marginal increase in taxes
on, say, good xt, that keep the tax revenues constant, will improve social wel-
fare if the xs’s concentration curve is below xt’s curve everywhere.
Formally, let the social welfare function be given by
(A9.1) ϖ = Σh µhυh (yh, p1, … , pn),

where υh is the indirect utility of household h, yh is the income of household
h, pi are commodity prices (with i = 1 ,…, n) and µh is the social weight for
each households h’s indirect utility. Suppose the government considers a tax
reform involving only two commodities, xs and xt. It considers marginally
increasing the tax on commodity xt and marginally decreasing that on com-
modity xs to leave total revenue constant (a revenue neutral change). If we
denote with xih the consumption of commodity i by household h and with Xi
the total consumption of commodity i by all households, then the tax reform
keeps total tax revenues R unchanged, with
(A9.2) R = Σk τkXk,
where k are the taxed commodities and τk is the tax rate on commodity k.
Under these assumptions, it can be shown that the welfare of a household h
is not worsened by the proposed tax reform if and only if
(A9.3) [ Xx – α Xx ] > 0,
s
s
st
t
where αst is defined by Wildasin (1984) and Mayshar (1988) as the marginal
social cost of raising one dollar of revenue by taxing the t-th commodity. This
may be generalized to consider all households h with h=1, … ,m,
m m
(A9.4) [ Σ x hs
h=1
Xs
– αst
Σ x ht
h=1
Xt ] > 0.
The expression (A9.4) can be seen as the difference between the height of
the relative concentration curve of commodity xs and the height of the rela-
tive concentration curve of commodity xt multiplied by a constant. These
concentration curves are similar to the familiar Lorenz curve, but instead of
total income, they consider the fraction of total expenditure on a commodity
attributable to different income groups. Consequently, for any additive so-
cial welfare function, a tax change increases social welfare if and only if the
concentration curve of commodity xs is not as high as the concentration curve
of commodity xt (multiplied by a constant) along the entire income distribu-
tion. This method is generally referred to as welfare dominance.
The dominance test may often be inconclusive because of the require-
ment that each concentration curve must be above the other everywhere along
the income distribution. In this case, conclusions can be only drawn by speci-
fying the weights attached to each household in the social welfare function.
Yitzhaki (1983), for example, provides a framework for analyzing welfare
dominance by using extended Gini coefficients. These allow for adjustments

in the social weights given to various households and provide a clearer no-
tion of how alternative social welfare functions differ with tax regimes. Spe-
cifically, the extended Gini coefficient is a weighted integral of the area be-
tween the Lorenz curve and the 45-degree line as a fraction of 0.5 (which is
the total area under the 45-degree line) and is given by
(A9.5) G(ν) = – νCOV[e(1 – F(e))ν – 1],
where ν is a parameter that affects the weighing of the points on the concen-
tration curve, F(e) is cumulative tax payment, and e measures the household’s
tax payment. When ν = 2, G(2) yields the traditional Gini coefficient, while
higher values would give more weight to commodities consumed by the
poorest households. Using equation (A9.5), it can then be shown that a rev-
enue neutral decrease in the tax on commodity xs, financed by an increase in
commodity xt, decreases the extended Gini index, if
(A9.6) ∫ [Φs(F) – αstΦt(F)](1 – F)ν – 2 dF > 0,

0
where Φi(F) for [i = s,t] is the concentration curve. Both concepts of welfare
dominance and of extended Gini coefficient are used in this chapter to exam-
ine the welfare implications of tax reforms.
In practice, all welfare dominance techniques tend to be difficult, as con-
centration curves tend to cross each other, especially toward the end of the
distribution. A solution to this problem was developed by Davidson and
Duclos (1997), who proposed a set of variance estimators to test the hypoth-
esis that two concentration curves are statistically different from one another.
Annex 9.2. Marginal Effective Tax Rate

The METR on capital calculated in this study is the effective corporate tax
rate on capital, while the METR on cost of production is an integration of the
METRs on all inputs, using the augmented Cobb-Douglas production func-
tion. The METR is estimated for both domestic and foreign firms. Unless
otherwise specified, all estimates are based on the 1997 tax regime and recent
economic indicators. The METR calculation is based on the assumption that
profit-maximizing firms base their investment or business decisions on the
foreseeable incremental net revenue at the present value. Taxes reduce the
profits accruing to the firm, while tax allowances mitigate such a reduction.
Because of the interaction between statutory tax provisions and actual eco-
nomic and industrial conditions, the effective tax rate can vary by industry
under the same tax regime. Furthermore, for a cross-jurisdiction compari-
son, the effect of taxation can be singled out by applying the same set of
economic and industrial conditions to different tax regimes.
The method used to estimate the METR has been extensively documented,
by Broadway, Bruce, and Mintz (1984); Chen and Mintz (1993); McKenzie,
Mintz, and Scharf (1992), Mintz (1990); and others. Other useful references
include Dunn and Pellechio (1990) and Shah (1995).
METR on Capital
As described, the METR on a given type of real capital investment is defined
as the proportional difference between the gross-of-tax rate of return (rG) and
the net-of-tax rate of return (rN) required by financial investors. The gross-of-
tax rate of return (rG) is the marginal revenue product, or user cost of capital,
net of economic depreciation. The net-of-tax rate of return (rN) is the weighted
average of the return to debt and equity securities held by the financial in-
vestor. Thus, the effective tax rate (t) is defined as
(A9.7) t = (rG - rN)/rG or t = (rG - rN)/rN.
The latter definition is used in this chapter.
Real Cost of Financing

For domestic firms, the real cost of financing (r f ) is defined by
(A9.8) r f = βi(1 – U) + (1 – β)ρ – π
where β is the debt-to-assets ratio, i is the cost of debt, U is the statutory
corporate income tax rate, ρ is the cost of equity, and π is the inflation rate.
While interest costs are deductible for income tax purposes, the cost of eq-
uity is not. That is, the cost of financing for a domestic firm is the weighted
average cost of financing, net of inflation rate. For foreign firms, the real cost
of financing (r f ) is defined by
(A9.9) r f’ = [β’I’(1 – U’) + (1 – β’) ρ’](1 – γ)/(1 – x) + γ[i(1 – U) – π + π’] – π’,
where β’ is the debt-to-assets ratio in the home country, I’ is the cost of debt
in the home country, U’ is the statutory corporate income tax rate in the
home country, ρ’ is the cost of equity in the home country, γ is the ratio of
debt raised in the host country to total investment fund, x is the weighted
average withholding tax rate in the host country, i is the cost of debt in the
host country, U is the statutory corporate income tax rate in the host coun-
try, π’ is the inflation rate in the home country, and π is the inflation rate in
the host country.
According to the equation (A9.9), the cost of financing to a foreign firm is
the weighted average of the cost of its investment funds taken from the home
country and debt raised in the host country. The former is the weighted aver-
age cost of financing at home net of withholding tax payable in the host coun-
try, and the latter is the cost of debt in the host country adjusted for income
tax deductibility and the difference in inflation rates between the home and
the host country.
Net-of-Tax Rate of Return on Capital

For domestic financial investors, the net-of-tax rate of return on capital is
defined by the formula
(A9.10) rN = βi + (1 – β)ρ – π.
This is the rate of return on capital required by the financial investor or
the supplier of investment funds. For foreign investors, the formula is
(A9.11) rN = [β’I’(1 – U’) + (1 – β’) ρ’ – π’](1 – γ) + γ(i – π).
This is the net-of-tax rate of return on capital required by fund suppliers,
including foreign financial investors in the host country. Applying equations
(A9.10) and (A9.11) to equation (A9.7), respectively, yields the effective cor-
porate tax rate on capital for domestic and foreign firms.
Gross-of-Tax Rate of Return on Capital
DEPRECIABLE ASSETS. For domestic firms, the formula is

(A9.12)rG = (1 + tm)(r f + δ)(1 – k)[1 – A + τ(1 – U)/(α + r f + π)]/[(1 – U)(1 – tp – tg)] – δ,
where tm is the tax on transfer of property or transaction tax (for example,
import duty) on capital goods where applicable, δ is the economic deprecia-
tion rate, k is the investment tax credit rate, A is the present tax value of the
accumulated capital cost allowance, τ is the capital tax rate, α is the tax de-
preciation rate, tp is the property tax rate, and tg is the gross receipts tax rate
or presumptive tax. For international firms, the formula is
(A9.13) rG = (1 + tm)(r f ’ + δ)(1 – k)[1 – A + τ(1 – U)/(α + r f ’ + π)]/
[(1 – U)(1 – tp – tg)] – δ.
INVENTORY. For domestic firms, the formula is

(A9.14) rG = (1 + tm)(rf + Uπζ)/[(1 – U)(1 – tg)] + τ,
where tm is the sales tax on inventory where applicable, and ζ is one for the
FIFO accounting method and zero for the last-in-first-out (LIFO). For inter-
national firms, the formula is the same except that the financing cost should
be the one relevant to the international firms, that is, r f should be replaced
by r f ’.
LAND. For domestic firms, the formula is

(A9.15) rG = r f(1 + tm)(1 + τ)(1 – U)/(r f + π)/[(1 – U)(1 – tp – tg)].
For international firms, the formula is the same except that the financing cost
should be the one relevant to the international investors, that is, r f should be
replaced by r f ’.
Aggregation
The effective tax rate for a given industry is the proportional difference be-
tween the weighted average of the before tax rate of return by asset type and
the after tax rate of return, which is the same across asset type within the
industry. That is, the marginal effective tax rate ti for industry i is calculated as
(A9.16) ti = (ΣjrijGwij – riN)/riN,
where j denotes asset type (such as investments in buildings, machinery, in-
ventories, and land) and wij denotes the weight of asset type j in industry i.
The above equations are general formats of the formulas used in this chapter.
Because of the variance among different sectors or jurisdictions, some vari-
ables can be zero for some sectors or jurisdictions. For example, none of the
three countries in this study have capital-based taxes, and hence τ = 0 in
equation (A9.12) – (A9.15).
METR Dispersion
METR dispersion, or the weighted standard deviation, is used to measure
the tax distortion. There are three measures of dispersions: overall, interin-
dustry, and interassets dispersion. Only interindustry dispersion is estimated
in this chapter. Let wi, wj, and wij denote the capital weights for the ith indus-
try and the jth type of asset, respectively. The interindustry METR dispersion
σI is calculated as the weighted standard deviation:
(A9.17) σ1 = Σjwj{Σiwij(tij – tj)2}1/2.
The expression tj is the average effective tax rate for the asset j across in-
dustries, and tij is the effective tax rate for the jth asset type in the ith industry.
METR in Other Inputs and Cost of Production
METR ON LABOR. This chapter assumes that only payroll taxes paid by em-
ployers are effective labor taxes borne by employers. Another assumption is
that the marginal unit of labor input is an average worker. Therefore, the
METR on labor is the total payroll taxes paid by employers on average labor
costs. Because payroll taxes in Tanzania and Uganda are imposed on total
payrolls, the statutory tax rate itself can be seen as the effective tax rate on
labor. In Kenya, the ceiling of taxable payroll is K Sh 80 per month, well
below the monthly payroll. As a result, the METR on labor in Kenya is esti-
mated to be as low as 0.1 percent. According to the International Labour
Organisation (1997), the average monthly payroll in Kenya was K Sh 3,324

for the manufacturing industry and tourism (1991 figure).
METR ON OTHER INPUTS. The METR on other inputs for production is the
transaction taxes firms have to pay on these inputs. Motor fuel is the only
other input included apart from capital and labor. The average transaction
tax rate (the fuel tax rate) is used as the METR.
METR ON COST OF PRODUCTION. By using the augmented Cobb-Douglas pro-

duction function, the METR on cost of production T can be estimated as
(A9.18) T = Π(1 + ti)tα – 1.
In the formula, i indicates an input (capital, labor, and fuel), ti is the METR
on each input i, and αi is the share of total cost for input i. The detailed deri-
vation may be found in McKenzie, Mintz, and Scharf (1992).
Annex 9.3. Figures and Tables for Household Incidence and METR
Figure A9.1. Concentration Curves for Main Taxes before Reform
1.0
Cumulative tax payments
0.8
0.6
0.4
0.2
0
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Cumulative household expenditure
45 degree Graduated personal tax
Total expenditures Excise tax
Sales tax Import tax
Income tax
Source: Authors’ calculations based on the 1992/93 integrated household survey and data
provided by the Ministry of Finance, Planning, and Economic Development.
Figure A9.2. Concentration Curves for Main Taxes after Reform
1.0
Cumulative tax expenditure
0.8
0.6
0.4
0.2
0
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Cumulative household expenditure
45 degree Value added tax
Total expenditures Excise tax
Income tax Import tax
provided by the Ministry of Finance, Planning, and Economic Development.
Table A9.1. Consumption Goods and Corresponding Tax Rates

(percent)
1992 import Sales 1995 import

Consumption good duties tax/CTL duties a VAT
Matooke, potatoes, maize,
cassava 0 0 0 0
Rice 30 30 20;4 0
Bread, macaroni, spaghetti 30 30 20;6 17
Meat, poultry and fish 0 0 0 0
Milk fresh (liquid) 0 10 0 0
Milk (powdered) 30 10 10;2 0
Other dairy products 30 10 0 0
Butter 10 20 20;6 17
Ghee 10 20 10;2 17
Hydrogenated oil 10 30 10;2 17
Margarine 10 30 20;4 17
Refined cooking oil and
other oils 10 20 10;2 17
Fruits, beans, lentils and nuts 0 0 0 0
Sugar (Uganda) 0 10 0 17
Sugar (imported) 20 10 20;6 17
Cocoa 30 30 20;6 17
Salt 10 10 10;2 17
Soda (all brands) 0 40 20;12 17
Passion fruit/orange juice 0 20 20;6 17
Other nonalcoholic drinks 0 40 20;12 17
Beer 350 70 20;12 17
Uganda waragi-refined 0 50 20;12 17
Other alcoholic beverages 100 50 20;12 17
Cigarettes (all) 100 50 30;12 17
Expenditure in restaurants
and cafes 0 10 0 0
Matches 40 20 20;6 17
Soap, detergents, toothpaste 30 50 20;6 17
Cosmetics 50 70 20;6 17
Shaving equipment,
insecticide, and shoe polish 30 30 20;6 17
Clothing, footwear, household
furnishings 30 10 20;4 17
Bags 30 30 20;6 17
Tapes and records 30 50 20;6 17
Rent (including imputed) 0 0 0 0
Water charges 0 10 0 17
Electricity 0 10 0 17
Paraffin 0 30 0 0
1992 import Sales 1995 import

Commodity duties tax/CTL duties a VAT
Other fuel and power 20 30 0 0
Plastic utensils 30 10 20;4 17
Enamel and metal utensils 20 10 10;2 17
Porcelain, glass, chinaware 30 30 20;4 17
Cutlery and kitchen tools 30 30 10;2 17
Bulbs, switches, plugs, cables 20 30 10;2 17
Tires, tubes, and other parts
and tools for transport 20 30 10;2 17
Petrol, diesel, oil, greases 75 30 0 0
Stamps, aerogrammes,
telephones 0 10 20;4 17
Expenditures on sports and
theatres 0 10 0 0
Hotels and other touring 0 10 0 0
Beds, sofas, chairs, other
furniture 0 30 20;6 17
Carpets, mats, decoration
articles 30 30 20;6 17
Personal cars and vehicles 30 20 20;6 17
Bicycles 20 10 20;6 17
Television sets 10 30 20;6 17
Cassette players and musical
systems 40 20 20;6 17
Video decks, cameras,
musical instruments 30 50 20;6 17
Jewelry 50 10 20;6 17
Watches 30 30 20;6 17
CTL Commercial transaction levy.
a. Figures after the semicolon represent the import duties charged on commodities under the
preferential trade area and/or customs union.
from the Ministry of Finance, Planning, and Economic Development and the Uganda Revenue
Authority.
Table A9.2. Extended Gini Coefficients of Taxes before Reforms, 1992
Alcoholic
Beverage drinks Tobacco
Excise Import Graduated Petroleum Paraffin excise excise excise Aggregate Total
V taxes duties Sales tax PAYE tax tax tax tax taxes taxes taxes taxes paid expenditures
2 0.452 0.540 0.521 0.904 0.303 0.889 0.334 0.746 0.649 0.515 0.557 0.426
306
4 0.620 0.717 0.699 0.971 0.489 0.981 0.522 0.905 0.786 0.705 0.722 0.626
6 0.685 0.775 0.759 0.986 0.569 0.989 0.602 0.934 0.833 0.769 0.777 0.699
8 0.723 0.805 0.791 0.991 0.616 0.991 0.649 0.945 0.858 0.805 0.807 0.739
10 0.748 0.825 0.811 0.992 0.646 0.992 0.681 0.949 0.875 0.828 0.825 0.764
PAYE Pay-as-you-earn.
Note: The higher the value of the parameter v, the higher weight is attached to goods consumed by the poor.
Source: Authors’ calculations based on the 1992/93 integrated household survey and data provided by the Ministry of Finance, Planning, and Economic
Development.
Table A9.3. Extended Gini Coefficients of Taxes after Reforms, 1995–96
Alcoholic
Coffee Beverage drinks Tobacco
Excise Import stabilization Petroleum Paraffin excise excise excise Aggregate Total
V taxes duties VAT PAYE tax tax tax tax taxes taxes taxes taxes paid expenditures
2 0.537 0.504 0.525 0.904 0.209 0.889 0.334 0.746 0.690 0.515 0.538 0.426
4 0.692 0.691 0.712 0.971 0.407 0.981 0.522 0.905 0.820 0.705 0.712 0.626
307
6 0.746 0.753 0.772 0.986 0.488 0.989 0.602 0.934 0.861 0.769 0.769 0.699
8 0.777 0.787 0.803 0.991 0.529 0.991 0.649 0.945 0.883 0.805 0.801 0.739
10 0.798 0.808 0.823 0.992 0.555 0.992 0.681 0.949 0.897 0.828 0.820 0.764
VAT Value-added tax.
Note: The higher the value of the parameter v, the higher weight is attached to goods consumed by the poor.
Development.
Table A9.4. Summary of Welfare Dominance Test Statistics, 1992
Alcoholic
drinks Beverage
Expenditure Import Graduated excise excise Tobacco Petroleum
Tax Paraffin (total) duties Sales tax Excise tax PAYE tax taxes duties excise excise
Paraffin 0 1 1 1 1 1 0 1 1 1 1
Expenditure (total) 0 0 1 1 –1 1 0 1 1 1 1
Imports 0 0 0 0 0 1 0 1 1 0 1
Sales tax 0 0 1 0 0 1 0 1 1 0 1
Excise tax 1 –1 1 1 0 1 0 1 1 0 1
308
PAYE 0 0 0 0 0 0 0 0 0 0 0
Graduated tax 1 1 1 1 1 1 0 1 1 1 1
Alcoholic excise 0 0 0 0 0 1 0 0 0 0 1
Beverage excise 0 0 0 0 0 1 0 0 0 0 1
Tobacco excise 0 0 0 0 0 1 0 0 1 0 1
Petroleum tax 0 0 0 0 0 0 0 0 0 0 0
Note: 1 in rows implies that tax is dominated (or more regressive), 0 implies that the tax dominates other taxes, –1 represents that the tax is neither
dominant nor dominated (indecisive).
Development.
Table A9.5. Summary of Welfare Dominance Test Statistics, 1995–96
Alcoholic
drinks Beverage
Expenditure Import Coffee excise excise Tobacco Petroleum
Tax Paraffin (total) duties VAT Excise tax PAYE tax duties duties excise excise
Paraffin 0 1 1 1 1 1 0 1 1 1 1
Expenditure (total) 0 0 1 1 1 1 0 1 1 1 1
Imports 0 0 0 1 –1 1 0 1 1 0 1
VAT 0 0 0 0 –1 1 0 1 1 0 1
Excise tax 0 0 –1 –1 0 1 0 1 1 0 1
309
PAYE 0 0 0 0 0 0 0 0 0 0 0
Coffee tax 1 1 1 1 1 1 0 1 1 1 1
Alcoholic excise 0 0 0 0 0 1 0 0 0 0 1
Beverage excise 0 0 0 0 0 1 0 0 0 0 1
Tobacco excise 0 0 0 0 0 1 0 0 1 0 1
Petroleum tax 0 0 0 0 0 0 0 0 0 0 0
Note: 1 in rows implies that tax is dominated (or more regressive), 0 implies that the tax dominates other taxes, –1 represents that the tax is neither
dominant nor dominated.
Development.
Table A9.6. Business Taxes in Uganda

(percent)
Taxes and allowances 1997 system Pre–1997 system

Capital taxes
Company income tax 30 30 (resident)
35 (nonresident)
Tax holidays n.a 3–6 years
Investment allowance
Structures n.a “Approved
business” only
Machinery 50–75 “Approved
business” only
Tax depreciation rate
Industrial buildingsa 5 4
Machineryb
Class 1 40 50
Class 2 35 40
Class 3 30 20
Class 4 20 n.a
Inventory accounting FIFO/LIFO FIFO/LIFO
Loss carry-over Forward Forward
indefinitely indefinitely
Personal tax on investment income
Withholding tax on interests 15 15
Withholding tax on dividends 15 15
Presumptive tax on small firms 1 on turnover n.a
Property tax 10 10
Indirect taxes on business
Import duty on capital goods n.a 5+
Average fuel tax 174 [Not calculated]
Payroll taxes 10 10
n.a Not applicable.
a. Straight line method.
b. Declining balance. The classification of machinery and equipment for tax depreciation
allowance varies significantly between the 1997 and pre-1997 systems. For example, computers
belonged to Class 3 under the pre-1997 tax system but Class 1 under the 1997 system (see Chen
and Reinikka 1999, footnote 16, for details).
Source: Ministry of Finance, Planning, and Economic Development and Uganda Revenue
Authority data.
Table A9.7. Nontax Parameters for Uganda
(percent)
Commercial
Expected inflation rate 4.9 4.9 4.9 4.9 4.9 4.9 4.9
Expected interest rate 21.4 21.4 21.4 21.4 21.4 21.4 21.4
Debt-to-assets ratio 25.0 25.0 25.0 25.0 25.0 25.0 25.0
Economic depreciation rate a
Buildings 4.1 3.7 4.0 5.3 3.5 4.2 3.6
Machinery 14.2 16.5 18.7 18.9 22.7 21.2 23.9
Tax depreciation allowance b
Buildings 5.0 5.0 5.0 5.0 5.0 5.0 5.0
311
Machinery 30.0 30.0 30.0 35.0 30.0 39.0 30.0
Capital structure by asset type
Buildings 10.6 28.7 33.5 10.2 9.9 57.2 71.1
Machinery 20.0 47.8 26.9 47.9 83.8 29.6 9.0
Inventory 33.4 17.7 33.7 37.3 3.2 2.1 1.2
Land 36.0 5.8 5.9 4.6 3.1 11.1 18.7
Cost structure by input for
production
Capital 96.6 54.1 72.9 66.0 74.0 60.6 69.3
Labor 3.0 37.2 23.0 31.1 20.9 36.5 26.7
Motor fuel 0.4 8.7 4.1 2.8 5.1 2.9 4.0
a. Based on Canadian data.

b. As a reference.
Source: Ministry of Finance, Planning, and Economic Development; Uganda Revenue Authority; and World Bank.
Table A9.8. Marginal Effective Tax Rate on Capital for Small Ugandan Firms
(percent)
Commercial
Asset agriculture Agroprocessing Manufacturing Construction Transportation Communications Tourism
Buildings 4.5 18.9 19.2 20.4 18.7 19.4 18.8

Machinery 2.0 2.1 2.3 2.3 2.5 2.4 2.6
312
Inventory 3.5 3.5 3.5 3.5 3.5 3.5 3.5
Land 1.0 12.4 12.4 12.4 12.4 12.4 12.4
Aggregate 2.4 7.8 8.9 5.1 4.4 13.2 15.9
regular taxable case –23.8 –15.4 –23.9 –18.5 –16.5 –17.7 –23.3
Interindustry dispersion: 2.2
Source: Authors’ calculations based on data provided by the Ministry of Finance, Planning, and Economic Development and the Uganda Revenue Authority.
Table A9.9. Business Tax Provisions Applicable to Manufacturing and

Tourism in Uganda, Kenya, and Tanzania, 1998
(percent)
Taxes and allowances Uganda Kenya Tanzania

Capital taxes
Corporate income tax 30 32.5 30
Investment allowance
Buildings n.a. 60 n.a.
Machinery 50–75 60 n.a.
Tax depreciation rate
Buildings
Manufacturing 5 SL 2.5 SL 4 SL
Tourism 5 SL 2.5 SL 6 SL
Machinery
Manufacturing 30 DB 14.2 DB 14.2 SL
Tourism 31 DB 22.3 DB 19.5 SL
Inventory accounting FIFO/LIFO FIFO/LIFO FIFO/LIFO
Loss carryover Forward Forward Forward
indefinitely indefinitely indefinitely
Withholding tax on dividends 15 7.5 15
Property tax
Structure 10 n.a. n.a.
Land 10 8 11.5–12.5
Payroll tax 10 5 up to 4
80K Sh/mo
Indirect taxes
Import duty on capital goods 0 5 0–5
Import duty on raw materials 7 15 10–20
Taxes on fuel (average) 174 64 26
SL Straight line method.
DB Based on declining balance.
FIFO First-in-first-out.
LIFO Last-in-first-out.
Source: Ministry of Finance, Planning, and Economic Development; Uganda Revenue
Authority; and World Bank data.
Table A9.10. Summary of Firm Survey Results on Tax Administration
(percent)
Commercial
Firm category agriculture Agroprocessing Manufacturing Construction Tourism Total
Tax-paying firms, 1997
Corporate income 29 46 41 80 54 46
VAT 19 80 80 96 79 74
Paid no taxes 7 11 8 4 7 8
Tax holiday firms
1995 13 51 36 5 33 32
1996 15 50 37 13 26 31
314
1997 18 48 42 12 26 35
Disagreed with assessment 37 51 51 64 57 51
Resolution
Negotiations 73 65 71 69 63 68
Court 0 0 0 0 0 0
Appeal 9 4 12 6 12 10
Unresolved cases 18 31 17 25 25 22
Total 100 100 100 100 100 100
Firms audited 41 69 71 80 71 68
Corporate income 26 46 35 72 43 41
VAT 30 59 66 68 64 60
Commercial
Firm category agriculture Agroprocessing Manufacturing Construction Tourism Total
Audit resulted in
Additional taxes 20 31 30 30 50 32
Other costs 20 29 25 10 30 24
Firms with inputs VAT credit 87 79 76 100 76 81
Filed for refund 22 54 49 60 22 45
Received expected refund 4 11 29 20 18 19
Received less or equal 50 7 19 10 20 0 12
315
Received more than 50 7 12 2 12 0 6
Received no refund 4 12 8 8 4 8
Waiting period for VAT refund
Up to 1 week 0 6 21 26 35 18
2–5 weeks 0 21 37 31 35 30
6–13 weeks 78 31 29 26 15 30
14–26 weeks 22 27 10 0 0 12
Over 26 weeks 0 15 3 17 15 10
Total 100 100 100 100 100 100
Note: Figures are a percentage of the total number of responses in each question.
Source: Authors’ calculations based on the 1998 enterprises survey.
References
Bahl, Roy. 1997. “Issues in Local Taxation in Uganda.” World Bank, Eastern
Africa Department, Washington, D.C. Processed.
Broadway, Robin, Neil Bruce, and Jack M. Mintz. 1984. “Taxation, Inflation,
and the Effective Marginal Tax Rate in Canada.” Canadian Journal of
Economics 27(1): 286–99.
Chen, Duanjie, and Jack M. Mintz. 1993. “Taxation of Capital in Canada: An
Inter-Industry and Inter-Provincial Comparison.” In Allan Maslove,
ed., Business Taxation in Ontario. Toronto: University of Toronto Press.
Chen, Duanjie, and Ritva Reinikka. 1999. “Business Taxation in a Low-
Revenue Economy. A Study on Uganda in Comparison with Neigh-
boring Countries.” Africa Region Working Paper no. 3. World Bank,
Washington, D.C. Processed.
Das-Gupta, Arindam, and Dilip Mookherjee. 1998. Incentives and Institutional
Reform in Tax Enforcement: An Analysis of Developing Country Experi-
ence. Oxford, U.K.: Oxford University Press.
Davidson, Russell, and Jean-Yves Duclos. 1997. “Statistical Inference for the
Measurement of the Incidence of Taxes and Transfers.” Econometrica
65(6): 1453–65.
Dunn, David, and Anthony Pellechio. 1990. Analyzing Taxes on Business In-
come with the Marginal Effective Tax Rate Model. Discussion Paper no.
79. Washington, D.C.: World Bank.
International Labour Organisation. 1997. Yearbook of Labour Statistics. Geneva.
Mayshar, Joram. 1988. “Note on Measuring the Marginal (Welfare) Cost of
Taxation.” Working Paper no. 175 (January). Hebrew University of
Jerusalem, Department of Economics, Jerusalem. Processed.
McKenzie, Kenneth, Jack M. Mintz, and Kim Scharf. 1992. “Measuring Effec-
tive Taxes in the Presence of Multiple Inputs: A Production Based
Approach.” International Tax and Public Finance 4(3): 337–57.
Mintz, Jack M. 1990. Corporate Holidays and Investment. World Bank Eco-
nomic Review 4(1): 81–102.
Republic of Uganda. 1995. “Input/Output Tables for Uganda (1989 & 1992).”
Ministry of Finance and Economic Planning, Statistics Department,
Entebbe.
Shah, Anwar, ed. 1995. Fiscal Incentives for Investment and Innovation. Oxford,
U.K.: Oxford University Press.
Wildasin, David E. 1984. “On Public Goods Provision with Distortionary

Taxes.” Economic Inquiry 22(2): 227–43.
World Bank. 1994. “The Private Sector in Uganda: Results of the World Bank
Yitzhaki, Shlomo. 1983. “On an Extension of the Gini Inequality Index.” In-
ternational Economic Review 24(3): 617–28.
Yitzhaki, Shlomo, and Joel Slemrod. 1991. “Welfare Dominance: An Applica-
tion to Commodity Taxation.” American Economic Review 81(3): 480–96.
Younger, Stephen D. 1996. “Estimating Tax Incidence in Ghana: An Exercise
Using Household Data.” In David E. Sahn, ed., Economic Reform and
the Poor in Africa. Oxford, U.K.: Clarendon Press.
Younger, Stephen D., David E. Sahn, Steven Haggblade, and Paul A. Dorosh.
1999. “Tax Incidence in Madagascar: An Analysis Using Household
Data.” World Bank Economic Review 13(2): 303–31.
10
The Cost of Doing Business: Firms’

Experience with Corruption
Jakob Svensson
Firms in Uganda perceive corruption as one of the most serious impediments

to conducting business. Despite this, little is known about the incidence and
cost of corruption in the private sector, nor about its effect on firm perfor-
mance, because until recently it was considered impossible to measure cor-
ruption systematically. However, with appropriate survey methods and in-
terview techniques, quantitative data on corruption can be collected. This
chapter exploits such data from a recent survey of private enterprises in
Uganda (see appendix B at the end of the book).1
This chapter presents three main findings. First, firms typically must pay
bribes when dealing with public officials whose actions directly affect the
firms’ business operations, and more than three-quarters of firms must pay
bribes. Second, the amount paid could partly be explained by certain charac-
teristics of the firm, such as profitability, which suggests that the amount
paid in bribes depends on how much a firm can afford. Third, firms that pay
higher bribes, on average, apparently do not receive more beneficial govern-
ment favors in return. The econometric work suggests that the relationship
between ability to pay and amount paid is not driven by reverse causation,
and that bribery slows firm growth, far more than taxation does. Further-
more, the time required to receive a public service is apparently not affected
by the amount of bribes paid.
These findings shed light on a hotly contested issue: the consequences of
corruption on firm growth and performance. At a conceptual level this has
been debated for several decades (for an excellent review, see Bardhan 1997).
On the one hand, corruption is considered similar to a tax, with the primary
1. See Republic of Uganda (1998) for results of a household survey on corruption.
319
320 Jakob Svensson
difference that the payment does not end up as public revenues.2 This “tax
effect” reduces both the return to private capital (because part of output will
be extracted in bribes) and the amount of internally generated funds or re-
tained profits firms can use for capital investment. To the extent that corrup-
tion also deprives the government of revenue required to provide produc-
tive public goods, corruption is likely to slow growth more than taxation. In
addition, the uncertainty and secrecy that necessarily accompany bribe pay-
ments are likely to compound this difference (see Shleifer and Vishny 1993).
On the other hand, proponents of the “grease argument” claim that in an
economy plagued by bureaucratic delays, bribery allows firms to avoid tax
and regulatory burdens and get things done faster. We find no support for
the grease argument, but robust evidence that higher corruption is associ-
ated with lower firm growth.
The quantitative data are consistent with the firm managers’ perceptions
of corruption. Figure A10.1 displays the top five constraints (of 24 constraints
listed in the questionnaire) as perceived by firm managers. In the sample of
all firms, corruption (based on average values) is ranked as the fifth most
serious constraint to business operations. Median values show that manag-
ers perceive six areas, including corruption, as a major problem.
When restricting the sample to subgroups of the sample population, cor-
ruption is an even bigger problem. Figure A10.1 displays the top five con-
straints for large firms (those with more than 100 employees), foreign-owned
firms (majority foreign owned), and exporting firms. For both large and for-
eign-owned firms, corruption is perceived as the second most important con-
straint. Exporting firms’ perceptions are very similar.
Taken together, the results support the claim that corruption has a large
adverse effect on firms. Of course, some firms may benefit from corrup-
tion, possibly a great deal. Some firms may choose to compete based on
costly preferential bureaucratic access—by devoting resources to obtain
valuable licenses, preferential market access, control of privatized compa-
nies, and so forth—instead of focusing on improving productivity. In cer-
tain areas and for some firms, bribes may substitute for other costs, such as
taxes. What this type of econometric work identifies is what is true on aver-
age, or in general. On average, the Ugandan data reveal that corruption is a
heavy burden on firms.
The next section describes the data collection effort in detail, followed
by a discussion of the general pattern of bribe payments with respect to
incidence, level, and effect on firm growth. Next, three typical (or average)
firms from subgroups of the sample are considered: one trying to obtain
connection to public services, one involved in trade, and one paying taxes.
Conclusions follow.
2. See Johnson, Kaufmann, and Shleifer (1997) on the public finance aspect
of corruption and Bardhan (1997), Tanzi (1998), and Wei (1999) for reviews of ex-
isting literature.
The Cost of Doing Business: Firms’ Experience with Corruption 321
The Data
Can reliable data on corruption be collected? For a long time, the common
view has been that given the secretive nature of corrupt activities, it is virtu-
ally impossible to collect reliable quantitative information on corruption.
However, Kaufmann (1997) forcefully argues that this presumption is incor-
rect. With appropriate survey methods and interview techniques, firm man-
agers are willing to discuss corruption with remarkable candor.3
The empirical strategy used to collect information on bribe payments
across firms in Uganda featured the following six components:
• An industry association (Ugandan Manufacturers’ Association) car-
ried out the survey. In Uganda, as in many other countries, people
have a deep-rooted distrust of the public sector. To avoid suspicion of
the overall objective of the data collection effort, the survey was done
by a body in which most firms had confidence.
• Corruption-related questions and the entire survey were carefully pi-
loted and built on existing surveys on regulatory constraints.
• Survey experts trained the enumerators.
• Questions on corruption were phrased indirectly to avoid implicating
the respondent of wrongdoing.
• The corruption-related questions were asked at the end of the inter-
view, by which time the enumerator presumably had established cred-
ibility and trust.
• To enhance the reliability of the corruption data, multiple questions
on corruption were asked in different sections of the questionnaire.
(Consistent findings across different measures significantly increase
the reliability of the data.) The survey instrument had roughly 500
entries, with a handful of them related to corruption.
The data collection effort was also aided by the fact that the issue of cor-
ruption has largely been desensitized in Uganda. The past few years have
seen several awareness-raising campaigns on the consequences of corrup-
tion, and the media regularly and freely report on corruption cases (see
Ruzindana, Langseth, and Gakwandi 1998; World Bank 1998).
Incidence, Level, and Effects of Corruption

The survey provides bribery data for 176 firms of 243 sampled. Of the 67
firms that did not respond to the main corruption questions, about one-third
declined to answer other sensitive questions (for example, about costs and
3. The Ugandan enterprise survey (see appendix B), carried out during January-
June 1998, was initiated by the World Bank and the Ugandan Private Sector Foun-
dation. Its primary goal was to collect data on constraints facing private enterprises
in Uganda.
322 Jakob Svensson
sales). As a group, the approximately 40 firms that did not answer questions
about corruption in particular did not differ significantly in size, profits, and
location from the firms that did reply to corruption-related questions. Thus,
no evidence suggests that the sample of 176 firms is not representative.
Incidence
Of the 176 firms that answered the question on bribe payment, 19 percent (33
firms) reported that they did not have to pay bribes, while 81 percent (143
firms) reported that they did. Table 10.1 shows noticeable differences between
the two groups of firms. Nonbribing firms have characteristics suggesting they
operate in sectors with little or no contact with the public sector, that is, in the
informal sector. They receive significantly fewer public services, proxied by
infrastructure services. They are less involved in foreign trade, proxied by share
Table 10.1. Sample Characteristics
Firms that reported Firms that reported

Characteristic zero bribe payments positive bribe payments
Infrastructure service provision 3.24 3.70b
Export share 0.15 0.33a
Pay tax index 2.58 3.04
Pay tax index (non-tax
exempted only) 2.50 3.28a
Time spent dealing with taxes
and regulations (log) 1.93 2.49a
Cost of accountant, and so
forth (log) 3.30 4.74a
Cost of security (log) 7.17 7.48
Incidence of robbery and theft 0.52 0.58
Size (log) 3.61 3.88
Note: Average values. Variable definition: infrastructure service = index (0–5) of availability
of public services (electricity, water, telephones, waste disposal, paved roads), 1 if available, 0
otherwise, index is the sum of the binary availability variables for the five services; export =
share of sales exported (1997); pay tax = index (0–6), sum of six binary (0 = no, 1 = yes) variables
reflecting types of taxes the firm pays (import duty, import commission, withholding tax, excise
tax, VAT, corporate income tax) (1997); time spent dealing with taxes and regulations = percentage
of senior management’s time spent each month dealing with government regulations (1997);
cost of accountant = monthly cost of accountant, lawyer, agent, specialized service provider to
deal with regulation and taxes in US$ (1997); cost of security = annual cost of security in US$
(1997); incidence of robbery and theft = binary variable taking the value 1 if the firm was a
victim of robbery, and/or theft during 1995–97, 0 otherwise; size = total employment (1997).
a. Rejection of the null hypothesis that the two means are equal at the 5 percent level.
b. Rejection of the null hypothesis that the two means are equal at the 10 percent level.
of output exported. They pay fewer types of taxes, particularly when control-
ling for tax exemptions. These findings suggest that firms typically must pay
bribes when dealing with public officials whose actions could seriously affect
business operations. This interpretation is further supported by the finding
that firms reporting positive bribe payments spend significantly more time
dealing with government regulations, and spend more money on accountants
and specialized service providers to deal with regulations and taxes.
The results support the bureaucratic extortion model presented in
Svensson (2000a) (see also Bliss and Di Tella 1997; Svensson 2000b). An inte-
gral assumption in this model is that public servants have discretionary power
within the given regulatory system to customize the nature and amount of
harassment on firms to extract bribes. Svensson shows that the extent to which
this can be done depends on how tightly the civil servants can control the
firm’s business decisions and influence the firm’s cash flow. These indirect
“control rights” stem from the existing regulatory system and the discretion
bureaucrats have in implementing, executing, and enforcing rules and ben-
efits that affect the firm, such as business regulation, licensing requirements,
permissions, taxes, exemptions, and provision of public goods and services.
The last two rows but one in table 10.1 show that the cost of security and
incidence of robbery and theft is similar for the two groups. In fact, the cost of
security per worker is higher for the nonbribing firms. Thus, while being in the
informal sector where civil servants have few control rights over the firm’s
business operations insulates the firm from public corruption, it does not pro-
tect the firm from other sources of discretionary redistribution, such as theft.
The average firm in the nonbribing group has fewer employees—mostly be-
cause of the existence of a few large firms in the nonbribing group—and the
difference is significant if three outliers (large firms) are dropped from the
nonbribing sample. Dropping these firms results in a significant difference
between the two groups; larger firms are more likely to have to pay bribes.
Level
The evidence suggests that bribe payments constitute a heavy burden on
firms. For the firms that reported positive bribes, the average amount of cor-
rupt payments was about US$8,280, with a median payment of US$1,820.4
These are large amounts, corresponding, on average, to US$88 per worker,
or roughly 7.9 percent of total costs (1 percent in the median). Including firms
reporting zero bribe payments, the average payment is US$6,730 with a me-
dian payment of US$450, or 6.4 and 0.5 percent, respectively.
Approximately 50 percent of the firms reporting positive bribe payments
pay more annually in graft than for security (including guards, equipment,
4. Using an exchange rate of US$1 = U Sh 1,100.

324 Jakob Svensson
and so forth). Table 10.2 compares the size of reported graft with other cost
items: wages, interest payments and cost of fuel. The cost of fuel, on average,
was 6.3 percent of total costs; wages were 18.1 percent, and interest payments
were 6.8 percent. The median values—which are significantly lower for cor-
ruption but similar for fuel and wages—show that the variance on reported
graft differs more than the variance in wage costs and fuel.
Of the 167 firms for which data on both bribe payments and taxes are
available, 70 percent reported higher bribe payments than corporate income
taxes, with a median difference of US$800. This high number is partly driven
by several small firms that do not pay corporate taxes. Still, the ratio of bribe
payment to corporate taxes for the firms that paid corporate taxes averages
120 percent (and 31 percent at the median). Table 10.3 compares the size of
reported graft and investment in machinery and equipment. A majority of
Table 10.2. Comparison of Corruption and Other Costs

(percent)
Firms reporting
positive graft All firms
Category Mean Median Mean Median
Corruption to total costs 7.9 1.0 6.4 0.5
Interest payments to total costs 6.8 0.0 8.3 0.0
Fuel to total costs 6.3 4.0 6.2 3.8
Wages to total costs 18.1 15.0 18.6 15.0
Note: Number of firms in sample of enterprises reporting positive graft = 132, and 164 firms in
“all firms” sample.
Table 10.3. Corruption and Investment

(US$)
Firms
Firms reporting
Firms reporting positive
reporting positive investment
Category All firms positive graft investment and graft
Corruption (mean) 6,818 8,376 9,108 11,645
Investment (mean) 149,000 124,545 253,636 220,909
Corruption (median) 455 1,727 909 4,545
Investment (median) 1,136 418 27,273 37,273
Number of firms 172 140 101 79
firms reported small or no investment in 1997. Consequently, almost 50 per-

cent of the firms reported larger bribe payments than total investment. The
distribution of bribes across firms is depicted in figures A10.2 and A10.3.
Despite the careful data collection strategy, the sample likely has cases of
misreporting, with the average graft numbers in particular being sensitive to
such misreporting. However, this chapter is not concerned with the level of
bribes per se, but rather on the correlates. The strategy used to collect infor-
mation on graft should have minimized any systematic biases in the correla-
tion between reported graft and the set of variables related to corruption. As
mentioned earlier, evidence exists that firms that cannot avoid dealing ex-
tensively with the public sector must pay bribes.
Svensson (2000a) develops and tests a model in which the amount paid
is a function of firm characteristics. The model’s intuition is straightfor-
ward. Thomas (1999) argues that the malfunctioning institutional system
in many Sub-Saharan countries (lack of performance-based evaluations,
discretionary dismissal powers) has given bureaucrats and office holders
with hiring and firing power the opportunity to demand payments from
those lower in the hierarchy (for a detailed analysis of the institutional sys-
tem in several Sub-Saharan countries see Thomas 1999). Increased uncer-
tainty of tenure has created strong incentives for those in government posts
to quickly extract as much as possible to protect against impending unem-
ployment or transfer to a less lucrative position. Consequently, many pub-
lic institutions and bureaucrats act like a price discriminator with a focus
of extracting rents.
In such a system, a firm with higher current profits or expectations of
higher profit in the future will be forced to pay higher bribes. Likewise, if the
firm cannot credibly threaten to change its business activity or location, or
import or export goods through other channels to avoid paying bribes, it
will have to pay higher bribes. Firm characteristics such as profitability and
the degree of reversibility of the installed capital stock thus determine the
relative bargaining strength of the firm relative to the bureaucrats.
Svensson (2000a) tests this hypothesis using data on current and expected
profits, and a measure of the reversibility of the installed capital stock.5 Table
10.4 reports summary statistics on these variables. Firms reporting high cor-
ruption (more than US$1,000) have significantly higher current profits, as
well as higher expected future profits (proxied by employment size and capital
stock), and use a production technology that would be costly to change (low
5. Expected future profits are proxied by the value of installed capital and em-
ployment size. The opportunity cost of capital is the product of the resale value of
capital times the degree of reversibility. The latter is measured as the difference be-
tween resale and replacement value of capital after controlling for the age of the capi-
tal stock. A negative value indicates that the firm’s stock of capital is costly to move.
326 Jakob Svensson
Table 10.4. Characteristics of Firms that Reported Positive Bribes
Low bribe High bribe

Variable All firms All firmsa paymentsb paymentsa
Profit (1997 US$)
Mean 211,060 284,390 57,540 540,110
Median 27,270 27,270 11,230 95,690
Standard deviation 1,134,460 1,048,116 119,660 1,489,290
Bribes
Mean 7,850 6,270 280 13,020
Median 910 910 180 9,090
Standard deviation 19,840 13,480 280 17,390
Capital stock (1997 US$)
Mean 365,760 346,760 174,550 540,890
Median 90,910 90,910 38,640 227,270
Standard deviation 667,190 648,260 394,500 809,010
Employment (1997)
Mean 119 109 36 192
Median 34 33 20 81
Standard deviation 262 251 53 346
Reversibility (log)
Mean 0.001 0.001 0.002 0.000
Median 0.011 0.011 0.012 0.009
Standard deviation 0.034 0.034 0.033 0.035
Number of observations 119 117 62 55
Note: Sample of firms for which data on corruption and other variables are available. Variable
definition: profit = gross sales less operating costs and interest payments, capital stock = resale
value of plant and equipment, reversibility = residual from the regressing of the ratio of resale to
replace values of the capital stock to the average age of the capital stock and a constant (all
variables in logs), employment = total employment.
a. Excluding two extreme outliers.
b. Low bribe payment is graft smaller than US$1,000.
reversibility). This is consistent with the rent-extraction hypothesis. How-

ever, these are just partial correlates, and two valid objections are as follows:
• Larger firms pay more bribes, but also make larger profits and have
more capital installed; size is the determining factor.
• Those firms that pay higher bribes receive valuable government fa-
vors in return, and thus make larger profits; reverse causation is an
influence.
To check what mechanism best describes the data, Svensson (2000a) set
up and tested the relationship between corruption, profit, capital stock,
employment size, and the opportunity cost (defined as the degree of

reversibility times capital stock) within a multiple regression framework.6
Table 10.5 depicts four of these corruption-level regressions, with different
dependent variables (corruption in U.S. dollars, logarithm of corruption, cor-
ruption per employee). Irrespective of specification, corruption is positively
Table 10.5. Corruption Regressions
Equation (1)a (2)b (3)c (4)c,d

Constant 8,701 8.83f 120.1f 112.8g
(4,509) (0.892) (45.1) (54.5)
Employment 11.39g 0.0023f n.a. n.a.
(4.76) (0.0004) n.a. n.a.
Profit 0.0037f 5.5E–7f 0.0041f 0.0069f
(0.0010) (1.0E–7) (7.4E–4) (0.0018)
Opportunity cost –0.259f –3.5E–5f –0.238g –0.260f
(0.089) (1.3E–5) (0.091) (0.098)
Capital stock 0.0059g 9.8E–7f 0.0042h 0.0037
(0.0023) (3.5E–7) (0.0022) (0.0024)
Walde 29.63i 51.64i 36.20i 21.82i
S.E. regression 12,168 1.74 123.0 128.2
Adjusted R2 0.18 0.35 0.21 n.a.
Observations 117 117 117 117
Notes: All regressions are adjusted for selectivity (Heckman 1979), the inverse Mills ratio is
not reported (see Svensson 2000a for details). Opportunity cost is the product of capital stock
and reversibility. Variable definition: profit = gross sales less operating costs and interest payments
in US$ (1997), capital stock = resale value of plant and equipment in US$ (1997), opportunity
cost = product of the resale value of capital in US$ (1997) times the degree of reversibility,
reversibility = residual from a regression of the ratio of resale to replace values of the capital
stock on the average age of the capital stock and a constant (all variables in logs), employment =
total employment (1997).
a. Dependent variable is bribe payments in US$.
b. Dependent variable is log of bribe payments in US$.
c. All variables scaled by employment.
d. 2SLS estimation.
e. Test statistic for the hypothesis that the coefficient on employment, profit, opportunity cost,
and capital stock is zero.
f. Significant at the 1 percent level.
g. Significant at the 5 percent level.
h. Significant at the 10 percent level.
i. Rejection of the null hypothesis of zero coefficients at the 1 percent level.
Source: Author’s calculation based on 1998 enterprise survey.
6. Profit is defined as gross sales less operating costs and interest payments.
The capital stock is measured as the resale value of plant and equipment, and labor
force is total employment. All data are for 1997 and the monetary values expressed
in U.S. dollars.
328 Jakob Svensson
correlated with current profits, expected future profits, and the opportunity
cost of capital. After controlling for size, firms with higher profits pay more
in bribes and firms with better outside options pay less. The results also sug-
gest that for most firms, more investment (through higher expected profits)
implies that more bribes need to be paid.
The last column in table 10.5 deals with the potential endogeneity prob-
lem by instrumenting for profits using a set of firm-specific variables that
arguably are uncorrelated with both the error term in the regression and
reported bribes, but are correlated with firms’ profit potential (and real-
ized profits). The instrument set includes proxies of human capital, age of
the firm, a measure of foreign ownership, distance to the main trading
center (the capital Kampala), and the cost of security per employee. As
shown by Reinikka and Svensson (chapter 7 in this volume), measures of
human capital are correlated with productivity and profits. Distance to
the main trading center presumably affects firms’ operating costs, and risk
arising from, for example, crime, has been found to be an important deter-
minant of performance.
The results in the final column support the claim that, on average, the
level and rate of graft are influenced by firms’ abilities to pay. The instru-
ments perform well, picking up around 6 percent of the variation in profits
across firms, and we cannot reject the null hypothesis of the validity of the
instruments; that is, we find no evidence that the instruments for the profit
rate belong in the corruption regression.7 These results do not prove that
bribe-paying firms do not receive preferential government treatment. They
may benefit, but the results suggest that the firm’s ability to pay determine
the price of this benefit.
Table 10.6 shows the effects on corruption (bribe payment) of both a one
standard deviation increase in the explanatory variables (column 1), and a 1
percent increase in the explanatory variables (column 2). The calculations
show; for example, that a one standard deviation increase in profits per em-
ployee is associated with roughly US$100 in additional bribe payments per
employee (equal to 0.76 standard deviations), while a 1 percent increase in
the capital stock results in a 0.22 percent increase in bribes paid.
Effects
So far the analysis has focused on who, why, and how much firms need to pay
in bribes. A logical follow-up question is “What are the effects?” From the pre-
vious two subsections it is obvious that evaluating the effects of corruption (such
as on firm growth) is a tricky exercise. The problem is identification, because
both growth and corruption are likely to be jointly determined. For example,
7. Svensson (2000a) also experiments with other sets of instruments. The results
remain similar to those reported in table 10.5 (column 4).
Table 10.6. Effects on Corruption of Changes in Firm Characteristics
(1)a Change in bribe

payment per employee
due to a one standard (2)b Change in bribe
deviation increase payment due to a 1
Equation in (US$) percent increase in (%)
Capital stock per employee 25.5 n.a.
(0.19)
Profits per employee 104.2 n.a.
(0.76)
Reversibility index –42.1 –0.118
(–0.31)
Capital stock n.a. 0.218
Profits n.a. 0.152
Employment n.a. 0.632
Note: Variable definition: profit = gross sales less operating costs and interest payments in
US$ (1997), capital stock = resale value of plant and equipment in US$ (1997), reversibility =
residual from a regression of the ratio of resale to replace values of the capital stock on the
average age of the capital stock and a constant (all variables in logs), employment = total
employment (1997).
a. Calculations based on regression 1, Table 10.5, with standard deviations in parentheses.
b. Calculations based on Svensson (2000a).
Source: Author’s calculation based on the 1998 enterprise survey.
consider two firms of similar size and age in a given sector. One of the firms
produces a good or brand perceived to have a favorable demand forecast, while
the other firm produces a good with much less favorable demand growth. As-
sume that both firms must clear certain business regulations and licensing re-
quirements or require some public infrastructure services. Also assume that
public servants have discretion in implementing and enforcing these regula-
tions and services. A rational rent-extracting bureaucrat would try to extract as
high a bribe as possible. In this arrangement, a bureaucrat would be expected to
demand higher bribes from the firm producing the good with a favorable de-
mand forecast, simply because this firm’s expected profits are higher, and thus
its ability to pay is greater. If the forecasts also influence the firms’ willingness
to invest and expand, a positive (observed) relationship between corruption
and growth would be expected when comparing these two firms.
Fisman and Svensson (2000) try to overcome this simultaneity problem
by instrumenting for bribes using industry-location averages as instruments.8
They argue that if this problem is specific to firms, but not to industries or
8. Fisman and Svensson (2000) show that the IV-technique employed is likely to
provide a lower bound (in absolute terms) of the effects of bribery on growth.
330 Jakob Svensson
locations, netting out this firm-specific component yields a bribe measure

that depends only on the underlying characteristics inherent to particular
industries and locations. For example, in industries, the number of produced
goods sold abroad, import reliance, and dependence on publicly provided
infrastructure services all determine to what extent bureaucrats can extract
bribes. Figure 10.1 illustrates the key findings in Fisman and Svensson (2000).
The higher the average bribery-to-sales rate, the lower the growth rate. As
evident, the effect is of considerable magnitude. A 1 percentage point in-
crease in the rate of “required” bribe payments reduces a firm’s annual growth
rate by about 3.5 percentage points.
Fisman and Svensson (2000) also compare the effects of corruption on
growth with the effects of taxation on growth. They find that in the whole
data set, the negative effect of bribery on firm growth is more than three
times greater than that of taxation on growth. Moreover, after excluding out-
liers, they find a much greater negative impact of bribery on growth and a
considerably attenuated effect of taxation. This provides some validation for
firm-level theories of corruption, which posit that corruption retards the de-
velopment process much more than taxation.
Figure 10.1. Corruption and Growth
25
20
Growth in sales (percent)
15
10
0
0 0.02 0.04 0.06 0.08
Bribe rate
Note: The bribe rate is the average bribery to sales rate. The bribe rate varies from 0 to 0.075
(7.5 percent) in the sample. The graph is based on the results reported in Fisman and Svensson
(2000) and is evaluated at the mean of the controls initial sales (in logarithms), firm’s age (in
logarithms), and the average tax to sales rate.
Source: Fisman and Svensson (2000).
It is worth repeating that in reality, some firms may still benefit—and

possibly a great deal—from corruption. This type of analysis identifies what
is true on average, and the Ugandan data suggest that in general, there is a
strong negative relationship between bribery payments and firm growth.
Case Studies
The experience of three typical firms—one trying to obtain public services,
one involved in trade, and one paying a range of taxes—is described based
on the survey data. These experiences are not based on one specific firm in
each category, but on three average firms with these specific characteristics.
Case Study 1: Getting Connected

Although reported bribe payments are the key corruption variable frequently
used, other methods exist for collecting objective data pertaining to corrup-
tion. Specifically, cost data on providing homogeneous public services (goods)
can reveal evidence of corruption. The survey collected information on two
variables related to delivery of public services. The respondents were asked
to report the total costs, including informal payments, of acquiring a connec-
tion to the public grid and acquiring a telephone line.
The fee for a telephone connection (around US$100) is supposed to be
fixed. Thus, deviations from the given price typically reflect graft. Connec-
tion costs to the public grid are more problematic, and are a complex func-
tion of load requirements, necessary upgrades, and distance to existing volt-
age connection. The complexity in determining the price of connection implies
that the public electricity company has large discretion over the cost.
Data on costs of acquiring a telephone line were obtained from 90 firms.9
Of those 90 firms, 83 percent (75 firms) reported costs above the fixed price.
On average, a firm paid US$130 in addition to the fixed price, more than
twice the stated cost to acquire a telephone line. The average firm had to
wait approximately 13 weeks to get connected. No relationship exists be-
tween connection cost and time waited. The simple correlation is 0.04. This
stands in stark contrast to the “efficiency grease” hypothesis that predicts a
negative correlation between bribes and bureaucratic delays, but is in ac-
cordance with the basic hypothesis laid out earlier. If public sector employ-
ers have discretion over implementation, delays are endogenously deter-
mined to explicitly extract bribes.
Figure A10.4 and table 10.7 present evidence that the excess cost paid by
firms constituted informal payments (bribes). Of the 75 firms that reported
excess connection costs, 13 did not report bribe data. For the remaining 62
9. Two extreme outliers (reporting errors) were dropped from the sample of firms
reporting connections to the telephone system and the public grid.
332 Jakob Svensson
Table 10.7. Partial Correlation between Connection Costs and Bribery
Equation dependent (1)a,b Connection costs (2)c Excess cost of

variable to public grid (log) telephone connection (log)
Constant 9.162 10.75
(0.000) (0.000)
Bribe payments (log) 0.508 0.068
(0.000) (0.001)
Adjusted R2 0.44 0.15
Number of observations 25 62
Note: Standard errors adjusted for heteroskedasticity (White 1980). p values in parentheses.
a. Regression 1 includes a proxy of informality (infrastructure service).
b. Connection costs (public grid) has mean U Sh 6,330,400 and median U Sh 2,500,000.
c. Excess cost of telephone connection has mean U Sh 155,600 and median U Sh 90,000.
firms there is a high correlation between the excess cost and reported bribe
payment (the simple correlation is 0.41), as illustrated in figure A10.5. Table
10.7, column (2), reports the simple regression of corruption on excess cost.
Excess cost of connection is highly correlated with reported bribe payment.
Of the 29 firms that obtained a connection to the public grid during 1995-
97, 25 answered the question on bribes, and all 25 reported paying bribes. On
average a firm paid US$5,540 for connection to the public grid, with the me-
dian firm paying roughly US$2,700, and waited a little more than 12 weeks
to get the connection. Part of the cost of connection may be caused by rea-
sons other than corruption, in particular, the firm’s distance from an existing
voltage connection. The survey has no data on this, but used an infrastruc-
ture service provision index indicating access to basic public services, such
as water, electricity, telephones, waste disposal, and paved roads, as a rough
proxy of the proper cost adjustment for location. The maintained hypothesis
is that the infrastructure service provision index is likely to be highly corre-
lated with distance to existing power connections.
Table 10.7, column (1), displays the result of regressing reported bribe
payment and the infrastructure service provision index on the cost of ob-
taining a connection to the public grid. Both variables enter highly signifi-
cant, thereby providing evidence that high cost of connection is linked both
to location-specific characteristics and corruption. Figure A10.4 shows the
partial correlation (controlling for location) between connection costs and
bribes (0.67). Again, the time to get connected and the cost (controlling for
location) is not correlated (partial correlation is 0.08). These findings are
consistent with recent empirical results from other developing countries.
Kaufmann and Wei (1999) examine the relationship between perception of
corruption and management time wasted with bureaucrats. Contrary to
the efficient grease argument, they find that firms that face more “bribe
demand” are also likely to spend more management time with bureaucrats
rather than less.
These results have two clear implications. First, collecting data on pro-
vision of homogeneous public services (goods) is a potentially fruitful way
to collect evidence of corruption indirectly. The data reveal that the provi-
sion of public services provides a powerful tool to extract bribes. Second,
the data also suggest that clearer rules can improve the situation from the
firms’ perspective. The relationship between bribe payments and excess
cost of telephone connection is weaker than that between bribe payments
and cost of getting connected to the public grid. However, clearer rules are
not sufficient if no mechanisms exist for accountability of the public sector
charged with providing public goods. Thus, even though a set price for a
telephone connection theoretically exists, most firms must pay significantly
more for a telephone line. More generally, the finding suggests that fight-
ing corruption is not purely a technical problem. Although reforms of rules
and regulations are important, the focus must be on creating a sustainable,
credible, and ongoing system of accountability of public institutions and
public servants.
Case Study 2: Exporting and Importing

Being engaged in trade, either exporting or importing, typically implies that
a firm must pay bribes. In fact, 91 percent of the trading firms reported posi-
tive bribe data, with an average level of graft equal to US$9,800 (the median
was US$2,050). Consistent with these findings, the median exporter perceived
corruption as a major problem (see figure A10.4).
No evidence exists that bribes speed up the process of getting goods in
or out of the country. For the average firm, imported goods require 66 days
to arrive. It takes 30 days from the original shipping port (typically in Eu-
rope) to Mombassa or Dar es Salaam, an additional 27 days from the port to
the clearance point (Nakawa inland terminal), and 9 more days from the
clearance point to the firm. Thus, firms involved in trade face additional
costs because of both corruption and inefficient public services. Again, pro-
vision of necessary services such as public transport and clearances gives
corrupt civil servants a mechanism to extract bribes.
Case Study 3: Paying Taxes

Firms that pay fewer types of taxes also face a lower probability of paying
bribes, particularly when controlling for tax exemptions. On average, the se-
nior management in a firm that pays a majority of taxes spends almost 20 per-
cent of its time dealing with government officials regarding taxes, permits,
regulations, and so forth. The cost of accountants, lawyers, and auditors to
deal with taxes and regulations cost the median enterprise nearly US$3,300 a
year. As table 10.8 shows, the level and rate of bribes are significantly higher
334 Jakob Svensson
Table 10.8. Differences in Tax Assessment and Corruption
Tax assessment Tax assessment

Category differs by 0–50% differs by 51–100%
Graft rate (bribery US$/employment) 59.6 157.6
Graft level (US$) 4,530 14,450
Time spent dealing with taxes, etc. (%) 15.1 16.5
Number of firms 37 18
for firms reporting large differences between their assessment of taxes to be

paid and the tax authority’s assessment. On average, a firm with a difference
in tax assessment of more than 50 percent pays three times as much in bribes as
a firm reporting a difference in tax assessment less than 50 percent.
Ample anecdotal evidence suggests that the tax system provides bureau-
crats with a potentially powerful tool to extract bribes. The firm survey evi-
dence supports this assertion, although it is difficult to separate the benefits
of lower taxes paid because of the bribe and the actual cost of the bribe. How-
ever, it is safe to conclude that with respect to the tax system, the biggest
loser is the public, because corruption deprives the government of income
required to provide public goods and services.
The relationship between number of taxes and corruption also has impli-
cations for tax policy in general. Streamlining the number of taxes and sim-
plifying the tax code can help mitigate the problem, and the tax reform en-
acted in 1997 aimed at this (see chapter 9 in this volume). However, the
simplification must be followed by auditing and accounting standards, and
these standards must be applied both to the firms and to the tax authority.
Conclusions
Ugandan firms perceive corruption as one of the most serious impediments
to conducting business. However, until recently it has been considered im-
possible to measure corruption systematically. No data were available con-
cerning the incidence and cost of corruption in the private sector or how
much it affected firms’ performance. With appropriate survey methods and
interview techniques, however, quantitative data on corruption can be col-
lected. The data show that firms typically must pay bribes when dealing
with public officials whose actions directly affect the firms’ business opera-
tions. Such dealings cannot easily be avoided when exporting, importing,
or requiring public infrastructure services. The data reveal that more than
80 percent of the firms must pay bribes during a typical business year. The
amount paid could partly be explained by firm-specific characteristics, such
as current and expected future profits and the reversibility of the capital
stock. This suggests that the amount paid in bribes is not a flat fee for a
given service provided by a public official, but a proportional tax on prof-
its: the more the firm can pay, the more it will have to pay. In other words,
the “price” for a given public service depends on ability to pay. No evi-
dence exists that firms that pay higher bribes, on average, receive more
beneficial government favors in return. In fact, the rate of bribery is nega-
tively correlated with firm growth. The negative effect of bribery on firm
growth is more than three times greater than the effect of taxation on growth.
The chapter has argued that clearer rules with respect to taxes and public
service provision can help mitigate the problem. However, without institu-
tionalized mechanisms for accountability of the public sector these changes
will be insufficient. These mechanisms include both formal or government
induced measures—it is important to select measures that are in line with
Uganda’s implementation capabilities—and measures to empower civil so-
ciety and the private sector. Collective action or measures on the part of the
business community could include the following:
• Collecting and disseminating information about corrupt practices
• Informing the private sector and the public about service standards,
guidelines, and norms of major service providers
• Increasing individual firm’s ability to commit to no bribery
• Recognizing those who are making efforts to resist corrupt practices.
As Paul (1997) argues, corruption generally can be effectively tackled only
when reform of the political process and restructuring of regulatory systems
are complemented by a systematic effort to increase citizens’ ability to moni-
tor and challenge abuses of the system and to inform citizens about their
rights and entitlements. Breaking the culture of secrecy that pervades the
functioning of the government and empowering people to demand public
accountability are two important components of such an effort.
Recent reviews of the growth performance of Sub-Saharan Africa have
identified recurring features of African politics that are likely to undermine
the results of traditional institutional reforms such as tax reforms. These in-
clude restricted civil society involvement, perceptions of the state as a ve-
hicle of wealth accumulation, prevalence of patronage politics, and a small
elite with close political connections. Although each may not be applicable
to every country, a successful national anticorruption program must also tackle
these fundamental determinants of corruption.
336 Jakob Svensson
Annex 10.1. Ranking of Constraints and Payment of Bribes
Figure A10.1. Ranking of Constraints to Investment by Firm Category,

1998
All firms
Utility prices
Taxes
Poor utility
Corruption
Cost of finance
1 2 3 4 5
No Small Moderate Major Severe
problem problem problem problem problem
Mean Median
Large firms
Utility prices
Corruption
Taxes
Poor utility
Tax administration
1 2 3 4 5
Mean Median
(figure continues on following page)

Figure A10.1 continued
Foreign firms
Utility prices
Corruption
Taxes
Poor utility
Cost of finance
1 2 3 4 5
Mean Median
Exporting firms
Utility prices
Taxes
Poor utility
Corruption
Cost of finance
1 2 3 4 5
Mean Median

338 Jakob Svensson
Figure A10.2. Distribution of Firms According to Logarithm of Bribe

Payments in U.S. Dollars
35
30
25
Number of firms
20
15
10
0
<3 4 5 6 7 8 9 10 11 > 11
Bribe payment (log)
Source: 1998 enterprise survey.
Figure A10.3. Distribution of Firms According to Bribe Payments
70
60
50
Number of firms
40
30
20
10
0
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
US$

Figure A10.4. Correlation between Graft and Excess Cost of Telephone

Connection
21
19
17
Graft (log)
15
13
11
9
9 10 11 12 13 14
Excess cost of telephone connection
Figure A10.5. Partial Correlation between Graft and Connection Costs

to Public Grid
2
Graft (log)
–2
–4
–4 –2 0 2 4
Connection costs to public grid (log)

340 Jakob Svensson
References
Bardhan, Pranab. 1997. “Corruption and Development: A Review of Issues.”
Journal of Economic Literature 35(September):1320–46.
Bliss, Christopher, and Rafael Di Tella. 1997. “Does Competition Kill Corrup-
tion.” Journal of Political Economy 105(October): 1001–23.
Fisman, Raymond, and Jakob Svensson. 2000. “Are Corruption and Taxation
really Harmful to Growth? Firm Level Evidence.” Policy Research
Working Paper no. 2485. Development Research Group, World Bank,
Washington, D.C.
Heckman, J. 1979. “Sample Selection Bias as a Specification Error.”
Econometrica 47: 53–161.
Johnson, Simon, Daniel Kaufmann, and Andrei Shleifer. 1997. “The Unoffi-
cial Economy in Transition.” Brookings Papers on Economic Activity 2:
159–239.
Kaufmann, Daniel. 1997. “Corruption: Some Myths and Facts.” Foreign Policy
(summer): 114–31.
Kaufmann, Daniel, and Shang-Jin Wei. 1999. “Does Grease Money Speed up
the Wheels of Commerce?” Policy Research Working Paper no. 2254.
World Bank, Development Research Group, Washington, D.C.
Paul, Samuel. 1997. “Corruption: Who Will Bell the Cat?” Economic and Politi-
cal Weekly 32: 1350–55.
Republic of Uganda. 1998. “National Integrity Survey. The Report to the In-
spectorate of Government.” Kampala.
Ruzindana, Augustin, Petter Langseth, and Arthur Gakwandi, eds. 1998. Fight-
ing Corruption in Uganda: The Process of Building a National Integrity
System. Kampala: Fountain Publishers.
Shleifer, Andrei, and R. W. Vishny. 1993. “Corruption.” Quarterly Journal of
Economics 108: 599–617.
Svensson, Jakob. 2000a. “Who Must Pay Bribes and How Much? Evidence
from a Cross-Section of Firms.” Policy Research Working Paper no.
2486. Development Research Group, World Bank, Washington, D.C.
_____. 2000b. “Foreign Aid and Rent-Seeking.” Journal of International Eco-
nomics 51(2): 437–61.
Tanzi, Vito. 1998. “Corruption Around the World: Causes, Consequences,
Scope, and Cures.” IMF Staff Papers 45: 559–94.
Thomas, Melissa. 1999. “The Incentive Structure of Systemic Corruption.”

World Bank, Washington, D.C. Processed.
Wei, Shang-Jin. 1999. “Corruption in Economic Development: Beneficial
Grease, Minor Annoyance, or Major Obstacle.” Policy Research Work-
ing Paper no. 2048. Development Research Group, World Bank, Wash-
ington, D.C.
White, H. 1980. “A Heteroscedasticity-Consistent Covariance Matrix Estima-
tor and a Direct Test for Heteroscedasticity.” Econometrica 50: 1–16.
World Bank. 1998. “Uganda: Recommendations for Strengthening the Gov-
ernment of Uganda’s Anticorruption Program.” Mission Report. Af-
rica Region, Poverty Reduction and Social Development, Washing-
ton, D.C.
11
Recovery in Service Delivery: Evidence

from Schools and Health Centers
Ritva Reinikka
It is commonly held that Uganda had a well-functioning social service deliv-

ery system in the 1960s. The subsequent economic and social decay all but
decimated this system, however. Undoubtedly, institutional recovery is more
complex than implementing policy reforms by “a stroke of the pen.” While
evidence on economic performance is fairly readily available, much less infor-
mation exists on Uganda’s institutional recovery during the past 15 years, ei-
ther in terms of institutional assessments or systematic recording of perfor-
mance indicators. This chapter sheds light on service delivery in education
and health. The two subsequent chapters, which explore household responses
to recent policy initiatives in these two sectors, complement this analysis.
The principal motivation for the study reported in this chapter was the
substantial increase in public spending on basic services, albeit from a small
base, since Uganda’s recovery started in the late 1980s, while several offi-
cially reported outcome and output indicators remained stagnant. The most
obvious disparity in output indicators was in primary school enrollments.
Despite increases in budgetary allocations for education, officially reported
enrollments increased only slightly during the first half of the 1990s. The
hypothesis for the study was that actual service delivery, or output, was much
worse than budgetary allocations implied because public funds, or inputs,
were subject to capture by bureaucrats and did not reach the intended facili-
ties (see, for example, Bardhan and Mookherjee 1998). To test this hypoth-
esis, the study’s author compared budgets and actual spending in the pri-
mary education and health care sectors.
This chapter draws on Ablo and Reinikka (1998). Comments by Jakob Svensson
are greatly appreciated.
343
344 Ritva Reinikka
While this chapter does not attempt a comprehensive analysis of public

sector efficacy, the government’s ability to translate budgetary allocations into
actual spending at the facility level can be a useful proxy for it. As adequate
public accounts are not available in many African countries, including Uganda,
a diagnostic survey of schools and clinics was carried out to collect actual spend-
ing data.1 Survey work is typically limited to examining the effects of policies
and interventions on households and firms, while inputs, such as flows of public
funds, and outputs, such as primary enrollments, are left solely for official
statistics or administrative records. As this study shows, a diagnostic survey of
the supply side can provide a useful reality check when institutions are weak
and official statistics are not a reliable guide for policymakers.
While the Ugandan school survey results indicate some improvement
in the input flow to service facilities during 1991–95, particularly in salary
payments, they also confirm a serious lack of accountability. For example,
only 2 percent of public nonwage education spending reached the schools
in 1991, and only 20 percent in 1995. If efficiency of input flow is an indica-
tor of the extent of institutional recovery, by 1995 this recovery was limited
at best. The dismal situation revealed by this school survey sparked action
by the central government, which began publishing information about
monetary transfers to districts and demanding that transfer information be
posted at schools and district headquarters. A recent replication of the school
survey shows that schools now receive more than 90 percent of the nonwage
spending intended for them, although often with delay (Republic of Uganda
2000). Hence, at least in some areas, institutional recovery in Uganda ap-
pears to be accelerating.
The 1996 school survey unearthed other important information critical to
understanding the education delivery system and the efficacy of potential
interventions. First, instead of being stagnant as official statistics indicate,
primary enrollments increased by 60 percent in 1991–95. This indicates that,
while input flow suffered from major problems, education system perfor-
mance in the first half of the 1990s improved more than the information sys-
tem that reports it. Furthermore, in 1997 the universal primary education
initiative, discussed in chapter 12, resulted in a sudden increase in enroll-
ment as households responded strongly to the president’s election pledge of
free education for four children per family.
Second, the survey showed that public primary education was mostly
funded by parents who, on average, contributed as much as 73 percent of total
school spending in 1991 (42 percent at the median school). When the govern-
ment retreated from funding and managing primary schools during the re-
pressive Amin and Obote regimes, parents took over. The survey data show
1. In 1990, the government initiated efforts to develop and implement a finan-

cial tracking system for primary education and health (Republic of Uganda 1990,
1992). These efforts bore little or no fruit.
Recovery in Service Delivery: Evidence from Schools and Health Centers 345
that by 1991 this situation had not changed much. However, the government’s
share increased during the survey period, and by 1995 parents financed 60
percent of total school spending on average (at the median school the parental
share was roughly halved to 23 percent). Strikingly, parental contributions con-
tinued to increase in real terms despite higher public spending.
The health facility survey showed that these facilities did not keep sys-
tematic financial or patient records in 1991–95. Therefore, assessing the flow
of funds or services delivered was not possible. The public service facilities
in the two sectors seem to vary their institutional behavior depending on the
institutional context and incentives. However, limited, recent evidence from
four districts shows that operations such as opening hours and staff avail-
ability, as well as recordkeeping, have improved in health facilities since 1996
(World Bank 1999).
The prevailing normative view of government assumes that once the right
policy or intervention has been found—to correct market failure or externali-
ties or to achieve a better distribution of income—the government imple-
ments it as designed, and the desired effects will follow. Some view govern-
ments as benevolent single agents, behaving in the same way everywhere in
the world, and policymaking as a technical problem rather than a political
process that varies between countries (Dixit 1996). New theoretical litera-
ture, however, takes a more nuanced view by differentiating governments as
providers of public goods. Svensson (1997), for example, finds that as society’s
polarization and degree of social conflict increase, the control of public policy
is less effective. This results in more public spending, but fewer public goods.
This emphasizes the importance of separating the effects of public capital on
welfare from the effects of public spending on public capital.
Pritchett (1996) argues that governments differ from the private sector in
the degree to which they behave as profit-maximizing investors. If public in-
vestment is guided by motives other than profitability, the cost of cumulated
public capital is likely to be higher than its value in terms of future returns.
Therefore, using investment cost to measure public capital across countries
may be misleading. Similarly, as demonstrated in this chapter, using budget
allocations to measure actual frontline service delivery may be misleading.
Several recent empirical papers also highlight the divergence between
the actual and potential impact of public spending on health outcomes in
developing countries. Filmer and Pritchett (1999) find that 95 percent of cross-
national variation in child mortality can be explained by factors not related
to health policy, such as per capita income, income distribution, female edu-
cation, and various cultural factors. Meanwhile, the impact of public spend-
ing—typically measured by budget allocations—is very small and statisti-
cally insignificant.
The rest of this chapter is divided into four sections. The first section briefly
describes the diagnostic survey carried out in Uganda in 1996. The next sec-
tion examines official data on primary enrollments over time and compares
them with the facility survey data for 1991–95. It presents the main results of
346 Ritva Reinikka
the primary school survey with respect to actual public and private spend-
ing at both the national and regional level. The chapter then explores service
delivery and public spending on primary health care. Finally, the chapter
concludes and summarizes the policy changes the government introduced
following the survey findings. The concluding section also highlights recent
evidence on improvements made since 1996.
Diagnostic Survey
Ideally, the public accounting system should provide timely information about
actual spending on various budget items and programs. This is not often the
case in many low-income countries. Because the revival of the accounting sys-
tem has been slow in Uganda, a field survey was necessary to gauge the extent
to which public resources actually filtered down to the intended facilities. A
survey of 19 districts covering 250 government-aided primary schools and
nearly 100 health clinics was carried out in 1996, covering the period 1991–95.2
Apart from school and health unit income and expenditure, the objective
of the survey was to collect data on primary enrollments and patient records
at the facility level.
From 10 to 20 schools were visited in each district.3 Of the districts sur-
veyed, Bushenyi had the most primary schools, with 399 in 1994, while
Bundibugyo had the least, with 59. In the districts with fewer than 100
government-aided schools, the enumerators visited 10 schools; in districts
with 100–200 schools, they visited 15; and in those with more than 200
schools, they visited 20. The primary school-leaving examination results,
2. For the sample selection, the country was first divided into regions. To bring
out regional differences more clearly, the traditional four regions (north, east, west
and central) were reconfigured into seven regions, namely: northwest, north, north-
east, east, central, southwest, and west. Kampala was treated as a separate region
because it enjoys many advantages over the rest of the country. The 39 districts were
then arrayed into 3 groups, based on the fiscal year in which a particular district first
received a separate budget vote under the decentralization program which commenced
in 1993. The objective was to pick one district per region in each successive phase of
decentralization. In practice, only two districts were selected from the smaller re-
gions. After some other minor adjustments, the following 19 districts were selected:
Kampala; Arua, Moyo (northwest); Apac, Gulu (north); Soroti, Moroto, Kapchorwa
(northeast); Jinja, Kamuli, Pallisa (east); Mukono, Mubende, Kiboga (central); Bushenyi,
Kabale (southwest); and Kabarole, Hoima, Bundibugyo (west). Kiboga, which is a
new district, had to be dropped subsequently because of limited data availability.
3. At the time of the survey, there were about 8,500 government-aided primary
schools, which were supposed to receive a large proportion of their funding from
central and local governments. The rest of the schools, about 1,500, were either pri-
vate or community schools.
supplemented by information about school facilities, were used as criteria

to select schools within a district. Both good and poor performers were
included in the stratified random sample.
Every district had many more schools than health facilities. Two districts—
Kapchorwa and Kisoro—had no government health centers, while some had
as many as 10. In some cases, missionary, private, or nongovernmental orga-
nization (NGO) facilities compensated for the lack of government facilities.
Enumerators visited five primarily government facilities in each district, such
as two health centers, two dispensaries/maternal units, and one aide post,
or some other combination.
Most of the enumerators who collected the data from schools and clin-
ics were former teachers and health workers who lived in those districts.
They used standardized forms, and supplemented the quantitative data
with qualitative observations. Enumerators were trained and closely su-
pervised by a joint Ugandan-World Bank research team to ensure quality
and uniformity of data collection and to assess the standard of recordkeeping
in schools and clinics.
Education and Public Spending

Before the introduction of free universal primary education in 1997, official
data indicates that primary school enrollment in government schools was
almost stagnant for 10 years (table 11.1). Because the number of children of
Table 11.1. Official Enrollment Data from Government-Aided Primary

Schools, 1987–97
Number of Number of Number of

Year schools teachers students (millions)
1987 7,627 72,970 2.31
1988 7,905 75,551 2.42
1989 7,684 81,418 2.53
1990 7,667 81,590 2.28
1991 8,046 78,259 2.54
1992 8,325 86,821 2.36
1993 8,430 91,905 2.67
1994 8,442 84,043 2.60
1995 8,531 — 2.64
1996 — 82,600 2.74
1997a 10,000 98,700 5.30
— Not available.
a. These data are from a nationwide headcount of pupils and teachers in August.
Source: Ministry of Education data.
348 Ritva Reinikka
primary school age had increased along with high population growth, it fol-
lows that net primary enrollment rates must have fallen.4
The official data cannot, however, be easily verified without going to the
school level because the districts kept virtually no reliable educational statis-
tics at the time. The well-developed recordkeeping of the 1960s broke down
during the political and military turmoil of the 1970s and early 1980s, and
had not recovered by mid-1990. The main source of official data for primary
enrollments was the annual school census carried out by the Ministry of Edu-
cation, which sent questionnaires to district education officers. The officers
sent them on to schools, which returned the questionnaires through the same
channel. Fieldwork by the school census staff was minimal.
Chapter 12 discusses in more detail the free universal primary education
for four children per family introduced in January 1997. This substantially
increased primary enrollment, which rose to 5.3 million students, based on a
nationwide headcount later in 1997, revealing a high private demand for
education. Most of the increase was in the first grade (P1). Both underaged
and overaged children entered P1 in 1997, producing an exceptionally large
cohort of 2.1 million children.
The school survey results, however, did not correspond with the trend
in the official enrollment figures (table 11.2). Instead of being stagnant, pri-
mary enrollment in the sample schools increased 60 percent between 1991
and 1995. The overall student-teacher ratio increased from 26:1 in 1991 to
37:1 in 1995. The survey results seem more plausible than the official fig-
ures, given the continuous improvement in the political and socioeconomic
environment and public finance since 1986. As the survey was based on a
careful examination of individual school records, it suggests that the
Table 11.2. Enrollment Data from Surveyed Schools, 1991–95
Year 1991 1992 1993 1994 1995

Number of students 81,318 90,330 109,063 119,919 129,087
Annual increase in students (%) 8 11 21 10 8
Number of teachers 3,077 3,312 3,663 3,897 3,498
Annual increase in teachers (%) — 8 11 6 –10
— Not available.
Source: School survey.
4. The 1992/93 integrated household survey recorded an average gross primary

enrollment of slightly more than 90 percent, while net enrollment (the proportion of
children between 6 and 12 years of age enrolled in school) was 67 percent nationally.
The net enrollment rate among the lowest expenditure quintile was only 46 percent,
and 59 percent for the second lowest quintile, compared with 81 percent for the highest
quintile. High dropout and repetition rates were also common (World Bank 1996a,b).
officially reported enrollment statistics grossly understate the progress made

in the 1990s. Determining where in the delivery system the incentive to
underreport was the highest or how it might have changed over time is
difficult. At the school level, it would have meant fewer tuition fees remit-
ted to the district, while at the district level underreporting would have
required smaller transfers of capitation grants to schools.
Availability of Data on Public Spending

The total budgetary allocation for recurrent expenditure on education almost
tripled in real terms during 1991–95 (table 11.3). Neither functional nor spatial
disaggregation of education spending is easy, however. First, at the central
government level, data were not available on salaries paid to primary school
teachers either by district or by school in 1991–95. The only data available were
the aggregate salary payments, which lumped together payments to teachers
in the primary, secondary, and tertiary levels, as well as those made to non-
teaching staff. This made systematic comparison of budget allocations for
teacher salaries and actual spending at the school level impossible. Also, some
teachers were not on the central government payroll, which further compli-
cated efforts to track salary spending. Additional teachers were hired directly
by schools and funded by parent-teacher associations (PTAs). The only sys-
tematic spending data available at the central government level were capita-
tion grants for nonwage spending.
Second, initially the intention was to track public spending through the
entire delivery system, which included the central government, districts,
and schools. The field survey revealed that the district-level records for
both nonwage and wage spending were even worse than at the central gov-
ernment level. The quality of available information both on transfers from
the center and disbursements to schools was so poor—both before and
Table 11.3. Recurrent Budget Allocation for Education, 1991–97

(1991 prices)
Year U Sh (millions) Index

1991 19,202 100
1992 30,002 156
1993 24,569 128
1994 32,258 168
1995 51,891 270
1996 49,027 255
1997 68,081 355
Note: The exchange rate ranged from U Sh 960 to U Sh 1,200 per U.S. dollar during 1991–95.
Data are from fiscal years.
Source: Ministry of Finance and Economic Planning data.
350 Ritva Reinikka
after decentralization—that districts were excluded from the expenditure

tracking exercise. School records were relatively comprehensive, however.
Presumably parents who contributed substantially to school income before
1997 demanded financial information and accountability from the school.
Therefore a detailed comparison of budgetary allocations and actual spend-
ing could only be made between the central government outlays for
nonwage spending and the equivalent school income.5
Actual Spending at Primary Schools

Table 11.4 presents a summary of the sources of income for the 250 sample
schools (both cash and in-kind). During 1991–95, the central government’s
financial contribution to primary education consisted of three components:
primary teacher salaries, capital expenditure, and capitation grants.
Teacher salaries was the largest item, consistent with the finding that
public spending choices tend to favor teacher salaries over their actual con-
tribution in producing educational outputs (Pritchett and Filmer 1997).
Capital expenditure was limited almost entirely to rehabilitation rather than
Table 11.4. Summary of School Income Data, 1991–95

(1991 prices in millions of U Sh)
Income 1991 1992 1993 1994 1995

Teachers’ salary payments by
government 213.9 214.7 381.3 748.6 914.6
Capitation grants received by
schools 4.2 15.8 58.0 60.9 58.3
Other government funding 73.8 62.5 73.6 118.7 147.1
Total government
contribution 291.9 293.0 512.9 928.2 1,120.0
Tuition collected 55.4 96.8 116.6 136.2 141.3
Amount of tuition retained by
schools 2.2 7.4 10.6 23.7 50.3
PTA levies 591.1 609.6 775.2 934.9 1,032.7
PTA salary payments 125.8 134.1 196.0 300.7 475.9
Total parent contribution 772.3 840.5 1,087.8 1,371.8 1,649.9
5. Donor assistance for primary education has come in two main ways. First,
financing has been made available for textbooks and other scholastic materials. Sec-
ond, donors have provided substantial financing for school construction. With the
exception of one major donor-funded project, tracking of donor and NGO expendi-
tures was difficult in the absence of any disaggregated data at the center.
new construction.6 The capitation grant for nonwage expenditure is a pay-

ment per student enrolled and is a 50 percent matching government contri-
bution against the mandated tuition fees paid by parents. The capitation
grant is intended to defray part of the costs of textbooks and other learning
materials, as well as general school running costs.
The survey confirmed that the main sources of income for government-
aided primary schools were, in order of importance, (a) PTA levies collected
from parents by the school, (b) central government transfers and PTA contri-
butions for teacher salaries, (c) government funding for capital expenditures
and capitation grants, and (d) retained tuition fees. PTA funds are under the
full control of the schools, and the PTA executive committee oversees their
use. Because their level depends on the ability of parents to pay, these levies
vary widely between schools and across regions.
The government’s total contribution to the funding of primary schools
almost quadrupled during 1991–95 in real terms, albeit from a negligible base.
This is proportionately more than the overall increase in education spend-
ing. Despite an increase in government spending, spending by parents
doubled during the same period. The average parental contribution per stu-
dent increased by 35 percent in real terms between 1991 and 1995, while the
average government contribution more than doubled (table 11.5).
Table 11.6 shows total expenditure by parents and government at the
median school during 1991–95. A comparison of the means and medians
shows that the distribution of parent expenditure at the school level is highly
asymmetric, with the median only a fraction of the mean. Hence the median
is a better measure of the general tendency in parent expenditure. The distri-
bution of government spending is much less asymmetric, although the me-
dians are lower than the means. Parent expenditure per student doubled
during 1991–95 at the median, while the increase in government spending
was almost fivefold during the same period.
Table 11.7 shows the proportion of school income from parents and gov-
ernment during 1991–95. Although declining in importance during the sur-
vey period, parental contributions were clearly the mainstay of finance in
6. Since the 1970s the central government had virtually abandoned its responsi-
bility for classroom construction. In principle, the provision of classrooms became
the responsibility of local governments. As the local government tax base needed to
support school construction is underdeveloped, local governments in turn passed
the responsibility for classroom construction on to parents. To shoulder this and other
school-related financial obligations, PTAs increasingly resorted to PTA levies. In ad-
dition, the central government is responsible for counterpart funding, which is the
government’s share of the cost of donor-financed development projects. The central
government also incurs expenditure on teacher training, examinations, and school
inspections, which have a separate allocation.
Table 11.5. Mean Parental and Government Contribution to School Income Per Student, 1991–95
(1991 prices in U Sh)
Parents Government
Year Tuition fees collected PTA levies PTA salaries Total Capitation grant Salaries Other Total
352
1991 682 7,269 1,547 9,498 68 2,630 908 3,606
1992 1,072 6,749 1,484 9,305 118 2,377 692 3,187
1993 1,069 7,108 1,797 9,974 280 3,496 675 4,451
1994 1,136 7,796 2,507 11,439 352 6,243 990 7,585
1995 1,094 8,000 3,687 12,781 330 7,085 1,139 8,554
Table 11.6. Median Parental and Government Contribution to School

Income Per Student, 1991–95
Year Parents Government

1991 1,173 1,639
1992 1,631 2,215
1993 1,792 4,179
1994 2,209 4,467
1995 2,291 7,729
Table 11.7. Parental and Government Contribution to Total School

Income, 1991–95
(percent)
Parents Government
Year Mean Median Mean Median
1991 73 42 27 58
1992 74 42 26 58
1993 68 30 32 70
1994 60 33 40 67
1995 60 23 40 77
government-aided primary schools. In 1991–92 parental contributions ac-

counted for more than 70 percent of school income on average; by 1995 the
share had declined to 60 percent. However, for the median school, parental
financing was less important, declining from 42 percent in 1991 to 23 percent
in 1995. This indicates a highly skewed distribution of spending.
Without an adequate breakdown of the salary data at the central gov-
ernment level, one of the key questions this study sought to answer was
how much of the nonwage expenditure (capitation grants) made available
by the central government actually reach the schools. The government’s
stated policy was to disburse the grant in full to the schools either in cash
or in-kind through the district education officers. The capitation grant was
set in 1991 at the nominal rate of U Sh 2,500 per child enrolled in grades P1–
P4 and U Sh 4,000 per child enrolled in grades P5–P7. These rates remained
the same until 1997, although they grossly underestimated the cost of pro-
viding scholastic materials and maintaining the physical facilities. Infla-
tion, although moderate since 1993, eroded the real value of the grant. Thus,
the real increase in total recurrent expenditure over time (table 11.3) was
354 Ritva Reinikka
not reflected in nonwage spending on primary education. To compensate

for the inadequacy of the central government provision for nonwage (and
wage) expenses, school administrators resorted to PTA levies.
Table 11.8 indicates the amount of capitation grant disbursed by the cen-
tral government and the average amount received by the schools (in 1991
prices).7 While the central government’s contribution in real terms was at its
highest in 1991, the schools received on average only 2 percent of this grant.
However, even if 1991 and 1992 are viewed as extreme cases, the figures for
1994–95, although higher, are still extremely low. In the best year the schools
received, on average, one-fifth of the capitation grant (zero at the median).
Recent evidence from a similar school survey shows that the situation has
improved greatly since 1995. With increased transparency, 90 percent of the
capitation grant is now released to the schools (Republic of Uganda 2000).
Interviews during the 1996 school survey confirmed that local govern-
ment authorities retained the bulk of the grant. Some districts apparently
disbursed the grant on the basis of how many students had paid tuition.
The funds intended for children who had enrolled but not paid tuition fees
were typically retained by the urban or district councils. This practice cer-
tainly hurt poorer communities the most, because in these communities
parents are more likely to default on the payment of tuition fees. Some lo-
cal governments reported that the discrepancy was used to cover the ex-
penses of the district education officer. In some districts the funds retained
by the local authorities were spent for purposes unrelated to education. In
addition, part of the intended grant apparently remained at the center, as
the government budgeted and disbursed the grant on the basis of the 1991
enrollment figures. As enrollment increased over time, the grant per stu-
dent actually disbursed to the districts certainly decreased.
During the survey period, parent contributions toward financing primary
education consisted of (a) tuition fees at the nominal rate of U Sh 2,500 per
child in grades P1–P4 and U Sh 4,000 per child in P5–P7 to match the capita-
tion grant paid by the government, (b) PTA levies that varied from district to
district and from school to school, and (c) contributions to teacher salaries.
Tuition fees collected by the schools were not remitted to the central govern-
ment. Rather, each district determined how the funds raised should be redis-
tributed among the schools. In some districts, the schools were allowed to
retain a certain percentage or a fixed amount of the tuition fee collected per
student, with the balance transferred to the district education officer. In other
districts the tuition fees collected were all remitted to the district headquar-
ters. Subsequent disbursements to schools, either in cash or in-kind, may or
may not have taken place. Collection efficiency of tuition fees was very low
in 1991, but has improved since 1992 (table 11.9).
7. The average capitation grant was based on the assumption that 70 percent of
students were in grades P1–P4 and 30 percent were in grades P5–P7.
Table 11.8. Average Capitation Grant Per Student, 1991–95
(1991 prices)
Schools actually received

Mean Maximum
Intended grant Percentage of Percentage of
Year amount (U Sh) U Sh intended amount Minimum Median U Sh intended amount
355
1991 3,100 68 2 0 0 2,509 26
1992 1,966 118 9 0 0 1,916 47
1993 1,869 280 28 0 0 1,867 67
1994 1,850 352 27 0 0 1,826 69
1995 1,737 330 26 0 0 1,734 56
Note: 997 observations; 71 observations omitted from the sample as outliers.
Table 11.9. Average Tuition Per Student, 1991–95
(1991 prices)
Tuition fees retained by schools

Mean Maximum
Tuition fees Percentage of Percentage of
Year collected (mean) U Sh fees collected Minimum Median U Sh fees collected
356
1991 682 27 4 0 0 256 38
1992 1,072 82 8 0 0 395 37
1993 1,069 97 9 0 0 398 37
1994 1,136 197 17 0 0 605 53
1995 1,094 390 36 0 0 546 50
In 1991 schools received, on average, 4 percent of the tuition collected. By

1995 this had improved considerably, but schools still only retained 36 per-
cent of the average tuition fees. Hence, as shown in table 11.9, local govern-
ment authorities not only retained the bulk of the capitation grant, but also
kept a large portion of the tuition fees paid by parents. Variation between
districts was also substantial.
Despite anecdotal evidence that teacher salary payments suffered from de-
lays and other problems in the flow of funds, interviews during the survey indi-
cated that government salary payments mostly reached the schools.8 Because of
the lack of annual disaggregated data at the center, salaries could not be tracked
through the system, but the school survey provides other useful information.
Teachers derived salaries from three sources: the government, PTAs, and
others such as NGOs (table 11.10). In 1991 and 1992 nearly half of teacher
salaries came from sources other than government. From 1993 on, the gov-
ernment contribution rose significantly, thanks to a presidential directive that
called for annual salary increases for teachers. Increased budgetary alloca-
tions were reflected in higher salary payments at the school level, but this
alone is not adequate to determine the extent to which budgetary allocations
translated to actual spending. Parental contributions fluctuated from a quar-
ter to a third of the total wage bill during the survey period. Note that the
share of total PTA contributions used for teacher salaries increased from 16
percent in 1991 to 29 percent in 1995, despite the quadrupling of government
spending on salaries.
Total spending on instructional materials and other nonwage items by
schools increased only by 20 percent in real terms between 1991 and 1995,
while the equivalent spending on salaries (government and parents combined)
tripled during the same period and more than tripled per teacher. Not only
did public spending choices favor teacher salaries over nonwage spending,
but teachers may have exerted a disproportionate influence over PTAs as well.9
However, the starting point was extremely low (U Sh 11,360, or around
US$12 per month, in 1991). This was less than a quarter of what the civil
service reform program considered a minimum living wage at the time. Sur-
vey interviews confirmed that absenteeism was a serious problem, as teach-
ers were compelled to make a living outside their profession. Although the
targeted living wage had not yet been attained by 1995, the situation had
improved considerably from the teachers’ point of view.
While teacher salaries were given priority over instructional materials
and other nonwage items, a major pay increase was perhaps warranted to
8. The only systematic way of misappropriating funds was by having “ghosts”

on the payroll. A total of 15,000 ghost teachers (around 20 percent of all teachers) was
removed from the payroll in 1993.
9. To some extent, donor funds compensated for slow growth in nonwage spend-
ing, but only in some schools.
Table 11.10. Contributions to Teachers’ Salaries, 1991–95
(1991 prices)
Government PTA Other Total

Year U Sh (million) Percent U Sh (million) Percent U Sh (million) Percent U Sh (million) Percent
358
1991 213.9 51 125.8 30 79.7 19 419.4 100
1992 214.7 52 134.1 33 61.5 15 410.3 100
1993 381.3 59 196.0 30 72.4 11 649.7 100
1994 748.6 66 300.7 26 86.7 8 1,136.0 100
1995 914.6 61 475.9 32 104.7 7 1,495.3 100
reduce absenteeism and restore the quality of teaching. Some evidence sug-
gests that this strategy worked, given the finding that enrollment increased
by 60 percent. At the same time, a more balanced spending pattern between
salaries and instructional and other materials might have produced an even
better result.
Regional Differences
As national averages conceal regional variations, it is useful to explore actual
spending in the subregions in the survey. Table 11.11 shows government ex-
penditures per student that reached the schools by subregion (in 1991 prices).
The western region appears to have the lowest per student public spending at
the school level, possibly indicating worse inefficiency in the transfer system
between the center and the schools than in other subregions. As schools are
not larger in the west than elsewhere, a lower unit cost is not likely to result
from a higher student-teacher ratio and a resultant lower wage bill.10
The opposite is probably true in the north and northeast, where classes
are smaller and the per student expenditure is therefore higher. To explore
regional differences in efficiency further, the capitation grant is a good proxy,
as this was intended to be the same amount per student across the country.
When the share of the capitation grant spent on the intended purpose is re-
gressed on a regional dummy variable (using ordinary least squares), only
the north (Apac and Gulu districts) entered negatively and highly signifi-
cantly (at 1 percent). The north is one of the poorest regions in Uganda, as
measured by household expenditure, and continues to suffer from conflict.
Parent expenditure per student has a much larger spatial spread than
public spending (table 11.12). The level of private spending is the highest in
the better-off central region and Kampala, while the three poor northern sub-
regions and the west have extremely low spending levels per student.11
Impact of Decentralization
Before fiscal decentralization, which began gradually in mid-1993, the bulk of
public funds came from the central government. The Ministry of Education
10. This appears to be the case in Kampala, where the share of public funding is
the smallest and classes are large.
11. The district-level (Spearman rank) correlation coefficient between public
spending on primary schools and poverty measured by household expenditure is
–0.228. Poorer districts seem to benefit from a somewhat higher level of public spend-
ing per student available to the schools. However, this may also reflect a lower student-
teacher ratio, as households in those districts can afford to send fewer children to
school. There is a positive correlation (0.56) between household expenditure and pri-
vate spending on primary education.
Table 11.11. Average Government Contribution Per Student Reaching Schools by Subregion, 1991–95
Year Northwest North Northeast East Central Kampala Southwest West

1991 1,623 4,866 2,599 3,546 5,878 1,067 5,718 1,958
360
1992 1,772 3,972 2,781 3,315 4,220 2,348 4,392 2,488
1993 3,964 4,664 5,138 4,516 6,122 3,535 6,285 3,307
1994 7,384 7,526 8,405 8,048 10,120 6,438 7,962 6,235
1995 12,811 8,151 7,748 8,179 10,318 8,636 7,300 5,977
Table 11.12. Average Parental Contribution Per Student by Subregion, 1991–95
Year Northwest North Northeast East Central Kampala Southwest West

1991 1,345 1,048 839 6,932 27,545 49,084 3,064 1,480
361
1992 976 991 1,195 4,709 20,134 65,829 3,436 1,559
1993 1,107 1,763 1,175 5,500 22,176 46,170 4,440 1,988
1994 1,880 2,074 1,070 7,196 27,576 41,792 6,053 2,189
1995 2,034 2,277 999 8,522 31,568 37,286 6,520 1,795
362 Ritva Reinikka
played a major role in primary education, controlling nearly all the recurrent
budget allocations for the sector. The district administrations, however, chan-
neled these funds to schools even before decentralization. Following decen-
tralization, district authorities and the district and urban councils gradually
gained control of the funds provided by the central government for primary
education. In 1996, estimates indicate that the ministry controlled only about a
quarter of the total recurrent spending on primary education.
The standard capitation grant is a good proxy for exploring the impact of
decentralization on the flow of public funds to schools, as it was supposed to
be the same (nominal) amount per student throughout the study period in
all districts. Using ordinary least squares, the share of the capitation grant
reaching the schools is regressed on time dummies and a decentralization
dummy variable. The latter takes the value one when the district where the
school is located was decentralized; otherwise it is zero.12
As table 11.13 shows, the input flow at the school level improved at a
statistically significant level over time, albeit modestly. The decentraliza-
tion variable (DECEN) enters significantly negative, indicating that decen-
tralization adversely affected the flow of funds to schools. The schools af-
fected by decentralization received, on average, 9 percentage points less of
the intended capitation grant per student than their counterparts in
Table 11.13. Impact of Decentralization on the Flow of Capitation

Grants to Schools, 1991–95
Year Coefficient t-statistic

1991 0.022 1.204
1992 0.060 3.332
1993 0.149 8.767
1994 0.221 11.617
1995 0.224 12.079
DECEN –0.093 –3.862
R2 0.085 n.a.
Number of observations 997 n.a.
Note: Ordinary least squares estimation. Dependent variable is the share of the capitation
grant that reached the school, 1991–95 are time dummies, and DECEN is a binary variable taking
the value one if the school is located in a fiscally decentralized district, zero otherwise.
12. For example, schools located in the districts that were decentralized first in
mid-1993 take the value one from the beginning of the following school (calendar)
year. The second phase of fiscal decentralization occurred in mid-1994 and the last
phase was in mid-1995.
nondecentralized districts. Instead of receiving 22 percent, they received 13

percent in 1995. The deterioration in decentralized districts may be tempo-
rary, but it serves as a reminder that decentralization could come with an
adjustment cost in terms of service delivery.
Health Care and Public Spending

As in primary education, limited official data exist from central government
health services at the time of the survey. Contrary to the education sector, how-
ever, the health unit survey found little systematic facility-level information
on financial flows or outputs, such as the number of inpatients or outpatients.
One explanation for such a marked difference in facility-level behavior be-
tween the two sectors could be that the PTAs that financed most of the school-
level expenditure in 1991–95 demanded basic recordkeeping and accountabil-
ity, while users in health clinics exerted no such pressure. A long-term
relationship between providers and beneficiaries that characterizes primary
education—in contrast to health care, where the relationship is typically short
and more ad hoc—clearly favors better organization on the demand side.
At the design and pilot stage of the survey, the researchers did not fully
anticipate the lack of almost any financial information at the facility level
and the heavy reliance on in-kind measures throughout the system. As the
data gathering proceeded, any hope of systematic tracking of expenditure
on the basis of data from primary health facilities faded. Many of the re-
sources received by health units were in-kind with no value indicated, and
hence not easy to compute. Although user fees are collected and retained at
the health facility level, records on their use were either not available or
patchy. Unlike in primary education where school income and expendi-
tures could be related to pupils enrolled, records on patients were extremely
poor and unreliable.13
Availability of Data on Health Spending

For the survey period, reliable health spending figures are available only for
1992/93 because of the difficulty of obtaining information about annual do-
nor flows. Public spending was only US$4.38 per capita (including donor
assistance) in 1992/93, while private spending was US$5.36. Although the
level of health spending is low in Uganda, this study attempts to examine
the flow of those minimal public funds from the center to service facilities.
13. Based on a cross-section of 61 developing countries, Uganda’s health outcomes

are worse than expected given its level of overall gross national product (GNP). An
infant mortality rate of only 71 (compared with 97) would be predicted for Uganda
given its per capita GNP in 1994 (Demery and Dorabawila 1997).
364 Ritva Reinikka
Poor efficacy magnifies the negative impact of a low level of spending on

health outcomes.
Recurrent budgetary allocations for health increased 2.5 times between
1991 and 1995 (table 11.14). However, donors finance the bulk of public
expenditure on primary health care. According to the data for fiscal year
1992/93, donors financed 77 percent of health spending, while the
government’s share was only 23 percent (World Bank 1996b). For hospitals,
the distribution was reversed, with donors funding 36 percent and the gov-
ernment funding 64 percent. With decentralization, nonwage recurrent ex-
penditure on primary health care became part of the block grant, but drugs
and other supplies funded largely by donors continue to be delivered from
the center. The central government’s main responsibilities were the salaries
of health workers. Most primary health workers were central government
staff seconded to local authorities; direct hiring by the local authorities was
limited. Despite decentralization, this was still the case during the survey
period. As in education, data on staff salaries were not disaggregated ei-
ther by district or health facility for 1991–95. At the district level, locally
recruited health workers are paid out of the district’s own resources, but
this information was patchy. Similarly, donor funding could not be disag-
gregated either by district or by facility.
As public resources dwindled from the mid-1970s, government health
facilities at all levels increasingly resorted to various informal charges for
drugs, meals, consultation, treatment, and operations. Attempts were made
in 1989 to formulate a national policy on user fees for public health services,
but were soon abandoned for another decade. The new national policy on
user fees was adopted in 1999. Before then districts theoretically could set
user fees for their health services, although in practice, the imposition of
charges was left to each facility. The Ministry of Health issued fee-for-service
guidelines that allowed up to 50 percent of fees collected to be spent on staff
incentives; up to 25 percent on drugs and supplies; and the rest on mainte-
nance, supervision, and outreach.
Table 11.14. Recurrent Budgetary Allocations for Health, 1991–97

(1991 prices)
Year U Sh (millions) Index

1991 6,381 100
1992 9,109 143
1993 8,863 139
1994 14,429 226
1995 16,819 264
1996 16,470 258
1997 19,925 312
Note: These are fiscal years.
Source: Ministry of Finance and Economic Planning data.
Qualitative Survey Results
Although the enumerators found little or no reliable quantitative output and

financial information at the health facilities they visited, they provided the fol-
lowing qualitative observations of the situation in health care facilities in 1995.
• Drugs were the main nonwage recurrent input into the primary health
care delivery system. They are supplied quarterly, directly to the health
units from the center. The central delivery system ensures that the
drugs reach health units with little or no leakage.
• Clinic compliance to user fee guidelines provided by the Ministry of
Health was minimal.
• Salaries for seconded staff generally reached the intended facilities,
although remuneration of health workers was low, resulting in un-
ethical conduct that adversely affected delivery of and access to pri-
mary health care. Local recruited staff were paid less, and less regu-
larly, which caused additional problems.
• Health workers devoted very little time to the activities of health units.
• Health workers had a high rate of attrition.
• Rural health units did not attract qualified health workers.
While the survey found that in-kind inputs into the health care system pro-
vided by donors and the government mostly reach the intended facilities, an-
other study carried out around the same time sheds more light on other prob-
lems regarding efficacy of services at the facility level (McPake and others 1999).
Researchers studied 12 health units in the Bushenyi and Iganga districts in
depth, using focus groups, exit polls, and direct observation, to determine the
socioeconomic survival strategies of health workers and their implications for
formal health financing policy. One of the findings was that health workers in
all but two facilities routinely charged users above the formally agreed levels,
and the drugs supplied by donors or the government were routinely used as a
source of additional income. The leakage estimate ranges from 40 to 94 percent
of the public supply of drugs to the facilities. McPake and others (1999, pp. 61–
62) summarize the findings of their study as follows:
The situation described by the preceding results suggest that
almost all elements of the system which were once public have
been incorporated into the private business activity of the health
workers. More than half the drugs supplied to public health units
had become the private property of health workers. The estimated
drug leakage rate of the median facility was 78 percent! The re-
sult is that very few free services were delivered in the public
health facilities, and almost none at all were delivered to the poor.
Little information exists about improvements in the health service in the
latter half of the 1990s. Although limited, a recent rapid assessment of data
availability for a new public expenditure tracking survey in four districts
(Bushenyi, Iganga, Ntungamo, and Tororo) indicated that both operational
366 Ritva Reinikka
efficiency of the health facilities and information on inputs and outputs had
improved compared with 1994–96 (World Bank 1999).
Conclusions and Policy Changes

This study was inspired by the observation that officially reported primary
enrollments did not improve in the first half of the 1990s, despite substantial
increases in budgetary allocations for the education sector. The hypothesis
was that without institutional recovery and improvement in accountability,
public funds were subject to capture before they reached the schools. A diag-
nostic survey of 250 schools and 100 health units was carried out in 1996 to
measure the actual outputs and public spending at the facility level to proxy
public sector efficacy by its ability to translate budgetary allocations into ac-
tual spending at the level of service facilities.
From the perspective of institutional recovery and accountability, the sur-
vey provided three major findings. First, the behavior of public service provid-
ers varies considerably between sectors, depending on the institutional con-
text and incentives faced. Primary schools kept relatively good records on
enrollments and financial flows, while health clinics had an almost complete
void of information both on outputs, such as inpatients and outpatients, or
financial information, such as user fees and cash and in-kind transfers of pub-
lic resources. This survey and other evidence from Uganda indicates that edu-
cational institutions improved faster in funding accountability than health in-
stitutions. Such a marked difference could occur because in primary education
parents financed most of the public school system. PTAs contributed as much
as 73 percent of the total school expenditure in 1991 and 60 percent in 1995,
and are likely to insist on accountability and exert pressure on the schools to
provide services in return for their contributions. (Parental contributions were
42 percent at the median school in 1991, which indicates a highly skewed spend-
ing distribution.) However, parents seemed to have little control over public
spending, which was dominated by central and local government bureaucrats.
Users of public health clinics were likewise unable to exert much pressure on
these services. As shown in chapter 13, Ugandans, including the poor, most
often opted for private services.
Second, instead of being almost stagnant as the official data indicated,
primary enrollment increased by 60 percent between 1991 and 1995. While
the survey results cast serious doubt over the reliability of the officially
reported data, they also point to a considerable improvement in the per-
formance of the system at the school level. Increasing enrollment rates
seem plausible, given the improvement in Uganda’s political and socio-
economic conditions.
Third, while the survey results indicate some improvement in input flow—
such as in teacher salaries, the main public spending item in education—
they also confirm that serious accountability problems remained in 1995. Only
2 percent of public nonwage education spending had reached the schools in
1991, and four years later this share had increased only to about 20 percent.
Although this is a significant improvement, the share remained abysmally

low. District authorities captured most of the nonwage public funds intended
for schools. Regression analysis also shows that decentralization negatively
affected input flow in the delivery system, at least temporarily.
In health care, drugs and medical supplies were transferred in-kind with-
out records of their value, making it impossible to generate systematic quan-
titative information about public funding reaching the facilities. Qualita-
tive observation during the field survey generally confirmed that drugs
and other supplies reached the health units directly from the center. How-
ever, a study by McPake and others (1999) suggests that, unlike in educa-
tion, the leakage occurred at the health unit level, where the staff siphoned
off 78 percent of the drugs and supplies to compensate for their low pay.
Although not fully comparable, recent evidence suggests some improve-
ment in health facilities since then.
The central government initiated the following immediate measures in
1996 in response to the survey findings to improve information flow and
transparency:
• Monthly transfers of public funds for wage and nonwage expendi-

ture to districts are now regularly published in the main newspapers
and broadcast by radio.
• All district headquarters and government primary schools are required
to maintain public notice boards and post monthly transfers of funds.
• Measures to enhance accountability and dissemination of accounting
information were incorporated in the 1997 Local Government Act.
• Districts are required to pay all conditional grants for primary educa-
tion directly on individual school accounts. School-based procurement
also replaced the highly inefficient central supply of construction and
other materials.
• A renewed effort is under way to put in place basic budgeting, ac-
counting, and auditing systems for the public sector, including local
governments.
The school survey was replicated in 1999, showing that the flow of funds
to schools has improved dramatically since 1995. This resulted from the cen-
tral government’s initiative to disseminate information monthly on transfers
through newspapers and radio and to insist that all schools post information
on the funds released to them (Republic of Uganda 2000). Schools now re-
ceive more than 90 percent of the intended capitation, on average, although
apparently with considerable delays because of inefficiencies in the districts
and the banking system. The median receipts of the capitation grant are also
around 90 percent.14
14. A preliminary analysis of the data shows that considerable variation remains
in what individual schools receive per student. In particular, variation can be ex-
plained by schools in Kampala having an advantage over rural areas.
368 Ritva Reinikka
Nevertheless, this represents a welcome improvement, particularly as the

universal primary education initiative of 1997, covered in chapter 12, has
substantially increased resource flows to the districts from their previous lev-
els, including the capitation grant.
Overall, this study demonstrates that improvements in institutions and
accountability are much more difficult to achieve than macroeconomic re-
form. Although improved since the beginning of the 1990s, service delivery
continued to suffer from major inefficiencies in the mid-1990s. Compared
with the evidence presented in chapter 3 on the adverse effects of cash man-
agement of the budget on expenditure programs, it appears that the volatil-
ity the “cash flow” system creates for some spending items may be relatively
insignificant compared with gross inefficiencies caused by lack of account-
ability. At the same time, Uganda’s experience shows the power of informa-
tion and transparency—publishing and posting of resource flows—in im-
proving accountability and service delivery.
References
Ablo, Emmanuel, and Ritva Reinikka. 1998. “Do Budgets Really Matter? Evi-
dence from Public Spending on Education and Health in Uganda.”
Policy Research Working Paper no. 1926. World Bank, Development
Research Group, Washington, D.C.
Bardhan, Pranab, and Dilip Mookherjee. 1998. “Expenditure Decentraliza-
tion and the Delivery of Public Services in Developing Countries.”
Working Paper (November). University of California, Department of
Economics, Berkeley.
Demery, Lionel, and Vajeera S. Dorabawila. 1997. “Health Outcomes, Pov-
erty and Health Spending: Uganda in International Perspective.” World
Bank, Poverty Reduction and Economic Management Network, Wash-
Dixit, Avinash K. 1996. The Making of Economic Policy: A Transaction-Cost Poli-
tics Perspective. Munich Lectures in Economics. Cambridge, Massachu-
setts: MIT Press.
Filmer, Deon, and Lant Pritchett. 1999. “The Impact of Public Spending on
Health: Does Money Matter?” Social Science and Medicine 49(10): 1309–
23.
McPake, Barbara, Delius Asiimwe, Francis Mwesigye, Matthius Ofumbi, Pe-
ter Streefland, and Asaph Turinde. 1999. “The Economic Behaviour of
Health Workers in Uganda: Implications for Quality And Accessibility
of Public Health Services.” Social Science and Medicine 49(7): 849–65.
Pritchett, Lant. 1996. “Mind Your P’s and Q’s. The Cost of Public Investment
is Not the Value of Public Capital.” Policy Research Working Paper
Pritchett, Lant, and Deon Filmer. 1997. “What Educational Production Func-
tions Really Show. A Positive Theory of Education Spending.” Policy
Research Working Paper 1795. World Bank, Development Research
Republic of Uganda. 1990. The Financial Tracking System for Primary Health
Care (PHC) and Primary Education (PE). Ministry of Planning and Eco-
nomic Development, Kampala.
_____. 1992. The Implementation Programme for the Financial Tracking System
(FTS) and the Reform of Local Authorities Budget Process. Ministry of Fi-
nance and Economic Planning, Kampala.
_____. 2000. “Tracking the Flow of and Accountability for UPE Funds.” Re-
port by International Development Consultants, Ltd. Ministry of Edu-
cation and Sports, Kampala.
Svensson, Jakob. 1997. “The Control of Public Policy: Electoral Competition,
Polarization, and Endogenous Platforms.” World Bank, Development
Research Group, Washington, D.C. Processed.
World Bank. 1996a. Uganda: The Challenge of Growth and Poverty Reduction. A
World Bank Country Study, Washington, D.C.
_____. 1996b. “Access to Education and Health Care in Uganda.” Eastern
Africa Department and Poverty and Social Policy Department, Coun-
try Operations Division, Washington, D.C. Processed.
_____. 1999. “Rapid Assessment of Data Availability in Health Core Units.”
With the Makerere Institute of Social Research. Washington, D.C. Pro-
cessed.
12
What Can We Expect from Universal

Primary Education?
Simon Appleton
President Museveni’s 1997 election pledge to provide free primary educa-

tion catapulted education issues up the policy agenda. Until that point edu-
cation had arguably been a low and declining priority for the government. In
1987, when the Museveni government had first come to power, it set up the
Education Policy Review Commission to report on the state of education.
The commission’s most notable recommendation was to attain universal pri-
mary education by 2000. However, the government was slow to implement
the measures and commit the resources needed to meet this goal.
The response to the universal primary education (UPE) initiative of 1997
was strong—leading to a near doubling of officially recorded primary school
enrollments—and the government’s modest funding increase was insuffi-
cient to meet demand. To deal with this dramatic expansion, the Education
Sector Investment Program of 1998–2003 envisioned a 50 percent increase
in expenditures on primary schools and a doubling of resources to second-
ary schools.
The apparent about face in 1997 has many possible explanations, includ-
ing short-term political considerations. The change in policy stance could,
however, also reflect a more fundamental shift in thinking about education
both as an intrinsically desirable goal (part of human development) and as
an investment in economic success (part of human capital). Uganda’s
The author is grateful to the Bureau of Statistics for the use of the data and to
Marcel Fafchamps, Dominique Guillaume, and Francis Teal for comments. The text
has benefited from useful comments by the editors and anonymous reviewers. A sec-
tion of this chapter draws heavily on the unpublished work of Kim Otteby (1999).
371
372 Simon Appleton
economic recovery has given the government the confidence that resources
can be found to meet the large long-term commitment implied by the UPE
initiative. Furthermore, rapid economic growth has transferred attention away
from purely economic measures of development and toward other indica-
tors (see, for example, the critique of Uganda’s success by the United Na-
tions Development Programme [UNDP 1997]). School enrollment is the so-
cial indicator perhaps most directly affected by government policy. Education
is also instrumental in the attainment of other social development targets,
such as health. Apart from the human development aspect, government opin-
ion may have shifted toward education as a productive investment. Before
1997 many officials questioned whether education—primary education, in
particular—was productive, especially when compared with investing in
physical infrastructure, such as roads.
This chapter focuses on three aspects of the UPE initiative: (a) the impli-
cations for the equity of educational access, (b) the likely affect on household
income generation, and (c) the implications for school quality and academic
performance.
Consider first the equity of educational access. A central part of the argu-
ment for UPE is that user charges curtail the enrollment of girls and the off-
spring of less-educated parents. Perhaps the most remarkable feature of the
UPE initiative to date is the particularly large increase in overall enrollments
following the removal of fees. Similar enrollment surges occurred as a result
of UPE initiatives in Kenya and Tanzania in the 1970s, and more recently in
Malawi in 1994, when enrollments rose 50 percent following the abolition of
primary school fees (Reddy and Vandermoortele 1996). These increases stand
in stark contrast to the assumption by advocates of increased user charges
for social services that charges would not greatly reduce, and could increase,
enrollment. Support for this assumption comes from conventional cross-
sectional estimates—which can often be misleading—that show small price
elasticities for education demand (Jimenez 1987). Using data from Uganda
before the removal of fees, small—and indeed perverse—estimates of the
price elasticities for enrollments are obtained when, in fact, the actual re-
sponse of enrollments to the abolition of fees was strong.
Increases in educational enrollments, particularly among disadvantaged
children, are desirable for many reasons. For a poor country like Uganda, the
hope is that educational expansion will increase the productivity of workers
and, hence, foster economic growth. The extent to which this hope is likely to
be realized is taken up in the section on returns to education. The value of
education—primary education, in particular—is largely based on estimates of
returns to wage employment. This chapter provides a more comprehensive
estimate of the effect of education on household earnings by looking at the
effects of education in all income-generating activities: wage employment, farm-
ing, and nonfarm self-employment. It also traces the effect of education in
reallocating family labor among wage employment, farming, and nonfarm self-
employment. This integrated approach provides a more reliable and rather
What Can We Expect from Universal Primary Education? 373
different picture of the returns to education than the existing studies of either
urban wage employment or agricultural production functions.
When assessing the possible income benefits of UPE, we take current as-
sociations between education and earnings as our guide. This may be peril-
ous for many reasons; one, in particular, is that UPE may reduce the quality
of education and, hence, weaken the economic benefits of schooling. The
third section of this chapter explores this issue using information gathered
from preliminary research on the impact of UPE in two districts of Uganda.
The research corroborates the hypothesized benefits of UPE in terms of en-
hancing the equity of educational access, but it also documents the deterio-
ration of conventional indicators of school quality, such as student-teacher
ratios. We obtain tentative estimates for the effects of school quality on stu-
dent academic performance by simulating academic testing before and after
UPE. Unlike much of the literature on educational production functions, these
results show a negative association between student-teacher ratios and aca-
demic performance. Consequently, by overstretching educational resources,
UPE risks a decline in student academic performance.
Access to Education Prior to the UPE Initiative

This section presents a multivariate model of school enrollment before the
UPE initiative that identifies the characteristics of children not attending
school. Because the UPE initiative has led to the enrollment of almost all
primary school-age children, the analysis will reveal the characteristics of
children who will most likely access primary education as a result of the
policy change. The research uses data from the 1992 Integrated Household
Survey because it was the largest household data set available at the time of
writing and is the richest in terms of potential explanatory variables.
Despite evidence that school enrollment increased between the 1992 sur-
vey and the UPE initiative, the survey represents the situation before UPE
quite well (see chapter 11 in this volume). The sample of school-age children
(ages 5 to 14) includes 4,122 who have never been to school, 8,857 who are
currently attending school, and 967 who have left school, for a total of 13,946.
After weighting the sample by population multipliers in order to yield na-
tionally representative results, 61 percent are in school, 32 percent never en-
rolled, and 17 percent left school.
A multinomial logit models the probability that a child has a particular
educational status (currently attending, never enrolled, or left school).1 The
1. The logit model is the standard statistical technique for analyzing an unor-
dered discrete variable, although it suffers from the limitation of imposing the “irrel-
evance of independent alternatives.” In other words, the relative probabilities of two
outcomes are unaffected by the presence of a third. This assumption is relaxed in the
multinomial probit, which is computationally more difficult to estimate.
374 Simon Appleton
model can be interpreted as the outcome of a process where the utility from
each choice is a linear function of the explanatory variables and a stochastic
term. The explanatory variables chosen for the model are personal character-
istics (age and sex), parental education; demographic characteristics of the
household (size and number of boys and girls), characteristics of the house-
hold head (age and sex), dummy variables for piped water and for use of
firewood, household income per capita, school fees, distance to schools and
district centers, and regional dummy variables.
Table A12.1 presents the results, but the coefficients are hard to interpret.
Consequently, table 12.1 presents predicted probabilities from the model,
evaluating at the means of the explanatory variables. The baseline figures
show that, at the mean of all explanatory variables, a child aged 5–14 has a 69
percent probability of being in school, a 25 percent probability of never hav-
ing been in school, and a 6 percent probability of having left school.2 Natu-
rally, these probabilities are highly age dependent. At five, a child has only a
15 percent chance of being in school. By 10 this chance increases to 82 percent
and then decreases with age.3 By 14 the probability of never having attended
school falls to 8 percent. Substantial gender inequalities exist. At the mean of
the other variables, girls are less likely to be in school, with a predicted prob-
ability of 65 percent compared with 73 percent for boys.4
Parental education has powerful effects on school enrollment. If both
parents have no formal education, the probability of their children never
attending school evaluated at the mean of the other explanatory variables
is 49 percent (figures not reported in tables). If both parents have
postprimary education, the corresponding probability is 5 percent. Each
increment in parental education reduces the probability of a child never
having been to school. Paternal literacy has a large impact on the probabil-
ity of enrollment. At the means of other variables, children with illiterate
fathers have a 39 percent chance of never having been in school, compared
with 26 percent if their fathers are literate. The literacy of mothers appears
not to have a marked effect, although some primary schooling does. With
the exception of literacy, maternal education generally has stronger effects
on school enrollment than paternal education.
Household income per capita raises the probability of attending school.
To avoid endogeneity problems, we use only the income of those over 20 years
of age. If household incomes are twice the average, the probability of being in
school is 79 percent, ten percentage points higher than the baseline. The effect
of shortfalls below the mean appears less pronounced: The probability of
2. These probabilities at the mean of the explanatory variables are different from
the mean proportions because of the nonlinearity of the logistic model.
3. Figures not reported in table 12.1 but are available from the author on request.
4. For comparative international statistics on gender inequalities in 41 countries,
see Filmer (2000).
Table 12.1. Predicted Probabilities from the Logit Model for School
Enrollment
(percent)
Never having
Category attended school Left school In school
Baseline (mean of all variables) 25 6 69
Boy 22 5 73
Girl 29 6 65
Father uneducated 39 6 56
Father literate 26 9 65
Father some primary 25 7 68
Father full primary 20 4 76
Father postprimary 15 4 81
Mother uneducated 34 6 60
Mother literate 32 8 61
Mother some primary 21 5 74
Mother full primary 14 4 82
Mother postprimary 9 6 85
Male head 26 6 68
Female head 22 6 72
Head aged 33 26 6 68
Head aged 53 25 5 70
Half mean income 29 6 65
Double mean income 16 5 79
No firewood 22 7 70
Use firewood 25 5 69
No piped water 27 4 69
Piped water 25 6 69
Primary school in each village center 22 6 73
Central urban 17 8 75
Central rural 19 6 75
Western rural 23 5 71
Western urban 20 7 73
Eastern rural 26 5 69
Eastern urban 26 6 68
Northern rural 37 5 57
Northern urban 29 6 66
Source: Author’s calculations from the 1992 Integrated Household Survey.
being in school if household incomes are half the mean is 65 percent, four
percentage points lower than the baseline. The magnitude of these pre-
dicted income effects is perhaps smaller than might be expected; however,
they are pure income effects. Actual differences in enrollments by income are
larger because income differentials are associated with variances in other ex-
planatory variables such as parental education and regional location.
376 Simon Appleton
The model makes perverse predictions of the effects of school fees and
parent teacher association (PTA) contributions levied by local primary
schools.5 Such charges predict an increase in the probability of attending
school: the coefficients on both the fee and the PTA contribution variables
are positive (table A12.1). In table 12.1 we do not report how much abolish-
ing fees is estimated to reduce enrollments, as such estimates are clearly
implausible in the light of subsequent events. Class sizes also had positive
effects in preliminary regressions. These results presumably reflect
endogeneity problems. If demand for education in a locality is high, schools
will be able to levy high charges and have large classes. Large classes may
also reflect high demand for a particularly high-quality local school. High
charges may be a cause of high demand, for example, if they permit an in-
crease in school quality. However, the reverse causality appears more plau-
sible: high demand enables schools to levy high charges. These perverse re-
sults are cautionary, given the large response of enrollments when the
government abolished charges in 1997. These results show the danger of re-
lying on cross-sectional estimates for policy purposes. An analysis based on
the 1992 data would not identify charges as a major constraint to attendance.6
Endogeneity problems may also arise with the variables for distance to
schools. One might expect schools to be located closer to where demand is
high. Unlike endogeneity biases on charges and class sizes, the likely
endogeneity bias on distance to school will reinforce the true structural ef-
fects. Distance to schools could be associated with low demand either be-
cause distance reduces demand or because high demand encourages the es-
tablishment of nearby schools.7 Consequently, one must be cautious in
interpreting the negative effects of distances to primary and secondary schools
on the probability of attending school. Only distances to primary schools
5. We could not reject the restriction that fees and PTA charges have equal effects
by using a likelihood ratio test and, hence, we imposed these restrictions on the model.
6. A referee queried whether the analysis was set up as a “straw man” and com-
mented that a more nuanced conclusion would be that cross-sectional analysis that
does not control for problems of endogenous fees (or school placement) can easily
lead to incorrect inference. However, many such cross-sectional analyses exist in the
literature, for example, those cited by Jimenez (1987). Such studies were influential in
the policy debate about user charges for social services in the 1980s and, indeed, are
praised for their rigor even by critics of user charges for basic social services (Reddy
and Vandermoortele 1996). The reason why such studies are the norm is that it is very
hard to find convincing instruments for user charges, school placement, and school
quality in cross-sectional data sets. Only a few studies with longitudinal data have
attempted to address the endogeneity of public programs.
7. A reviewer suggested that schools might be placed where they are needed
most, biasing the estimated effect of distance to school towards zero. However, it
seems more likely that schools in Uganda have been established where there is local
demand.
have statistically significant effects. The Ugandan data on distance is limited

in that it refers to distance of the school from the center of the village (LC1),
not the distance of the child’s home from the school. Distances from village
centers to primary schools are not great for most communities—one kilome-
ter or less for two-thirds of the children. Having a school in the center of each
village is predicted to raise school attendance from 69 to 73 percent.
A number of demographic characteristics of the household significantly
affect outcomes. Children from households with female heads are more likely
to be in school than are those from households with male heads, after con-
trolling for other characteristics (72 percent compared with 68 percent). The
age of the household head has a nonmonotonic effect on school attendance.
Up to age 34, the probability of being in school decreases with the age of the
household head; thereafter, it increases. The effects are modest: a household
head aged 53 (10 years older than the mean) raises the probability of being in
school by only 1.5 percentage points. Additional household members increase,
not always significantly, the probability of school enrollment, controlling for
per capita income, consistent with the presence of economies of scale in house-
hold consumption. Extra children cause more of an increase than adults, con-
sistent with children having less costly needs than adults, for example, need-
ing fewer calories.8 Girls in the household increase the probability of school
enrollment more than boys, because girls’ lower enrollment rates, on aver-
age, provide less competition for educational funding within the household
than boys. The use of firewood and the absence of piped water are hypoth-
esized to increase the demand for child labor. While the absence of piped
water and the use of firewood do not materially alter the probability of chil-
dren attending school, they do raise the probability of not attending school
and reduce the probability of dropping out. This finding suggests that they
delay school enrollment, but do not prevent it.9
The significance of the dummy variables for location affect educational
outcomes in ways that cannot be explained in terms of parental education,
income, or the included infrastructure variables. However, the model is fairly
successful in explaining differences in enrollment rates in terms of observ-
able variables. For example, the actual proportion of children in school is 83
8. In theory, it would be possible to adjust the household income variable to

make some allowance for economies of scale. In practice, we have no agreed method
of estimating such economies of scale, and different approaches can lead to dramati-
cally varied estimates (see Lanjouw and Ravallion 1995).
9. We could argue that firewood use is endogenous. However, the likely bias
would be to exaggerate the negative effect of firewood use on enrollment. Unobserv-
able factors associated with households using an inferior fuel source such as fire-
wood may also be associated with educational disadvantage. Reverse causality—
households using firewood because they have children available out of school—would
induce the same direction of bias.
378 Simon Appleton
percent in central urban areas and 45 percent in northern rural areas. Evalu-
ating at the means of the explanatory variables, the proportions change to 75
and 57 percent, respectively. Thus, just over half of the gap in enrollments
between the two areas has been explained in terms of the determinants in-
cluded in the model. However, northern rural data have particularly atypi-
cal educational outcomes after controlling for observable determinants such
as education and income. The model shows relatively small differences be-
tween other areas after such controls. For example, in the raw data 83 per-
cent of the sample in the central urban region attend school compared with
70 percent of the sample in the central rural area. Nonetheless, in the model,
rural and urban areas of the central region are predicted to have the same
proportion in school, at the mean of other explanatory variables. The model
therefore explains all the mean differences in enrollments between rural
and urban areas of the central region in terms of observable determinants,
such as parental education and income. The model also predicts small
urban–rural differentials—other things being equal—in western and east-
ern regions. Only the sizable urban–rural differential in the northern re-
gion is unexplained by observed household characteristics.
In summary, the multivariate analysis of school enrollment in 1992 iden-
tifies inequalities that have disappeared or considerably diminished with UPE.
Taken individually and holding other things constant, differences in paren-
tal education, gender, household income, and region can by themselves lead
to pronounced differences in the probability of attending school. Often such
effects will be combined: for example, northern rural households are likely
to have below average parental education and household income. Inequali-
ties in education are likely to be of concern for many reasons. The next sec-
tion focuses on the instrumental economic importance of education.
Returns to Education: Productivity and Labor Allocation Effects

If, as is often claimed, returns to primary education in Africa are high, then
that is prima facie evidence that market failures—such as credit market im-
perfections—are preventing the realization of those returns. The size of the
economic returns to education thus has some bearing on the efficiency of
policies like UPE to expand access and provides evidence on the likely im-
pact of such initiatives on economic growth.
A survey of the literature—mostly conventional studies that measure the
effects of education on wage earnings—reports social returns to primary edu-
cation in Sub-Saharan Africa of 24 percent (Psacharopoulos 1994).10 Bennell
(1996) has questioned these estimates because they are strongly influenced
10. Social returns are 18 percent to secondary education and 11 percent to tertiary
education. Private returns are 41 percent to primary education, 27 percent to second-
ary education, and 28 percent to tertiary education.
by a few studies that used poor data.11 Recent estimates of Mincerian returns
to education (that is, wage premiums to a year of education) produced dis-
tinctly different results.12 A study of 2,174 urban wage employees in Uganda
in 1992 found Mincerian returns to education of 4 percent at the primary level,
8 percent at the secondary level, and 28 percent at the tertiary level (Appleton,
Hoddinott, and Knight 1996).13 These Mincerian returns are not comparable
to the widely cited rates of return summarized by Psacharopoulos (1994). In
particular, they may underestimate returns to primary school because they
implicitly assume students forego wages to attend school, and they may over-
estimate returns to tertiary education as they ignore the direct costs of the
education. However, the Mincerian returns do suggest modest gross benefits
to primary education. They appear to provide some support for the view ex-
pressed by some in the Ugandan government prior to 1997 that students who
left primary education had acquired few useful skills, and so no great eco-
nomic return could be expected from additional expansion of such schooling.
This section, in common with standard microeconomic estimates of rates
of return to education, provides estimates of the benefits of education based
on cross-sectional partial associations between education and earnings.
These associations are unlikely to be a fully reliable guide to real returns.
Perhaps the most common concern is that they may be subject to omitted
variables bias; that is, educated adults may be more productive for unob-
served factors (higher preschool ability, better family background, and the
like) rather than because of their schooling. A few studies outside Uganda
have attempted to control for such problems by trying to measure preschool
ability (Knight and Sabot 1990) or by using difference estimates from
samples of twins to remove the effects of family background (Ashenfelter
11. One such study of Uganda in 1966 estimated a 66 percent return to primary
education, but relied purely on government wage scales for the educated. As the
study had virtually no hard data on incomes of the uneducated, the 66 percent was
effectively an assumption rather than an empirical observation (see Knight 1968, for
an early critique of the study).
12. Mincerian returns to education are the wage premiums to a year of education
(Mincer 1974). They correspond to the private return to education on a number of
strong assumptions, notably that (a) there are no pecuniary costs to education, (b) the
opportunity cost of education is the wage, and (c) the individual lives forever.
13. These returns show a similar pattern, but at somewhat lower levels than those
obtained elsewhere in Sub-Saharan Africa. Since 1980, returns have averaged 5 per-
cent for primary school, 14 percent for secondary school, and 37 percent for univer-
sity (Appleton 1999). In 1990, a study of 298 employees from Kampala produced dif-
ferent returns: 9 percent for primary education, 3 percent for secondary education,
and 11 percent for tertiary education (Bigsten and Kayizzi-Mugerwa 1999). The au-
thor was unable to reconcile the two sets of results for Uganda because the data un-
derlying the latter estimates have apparently been lost. Given the difference in sample
sizes and representativeness, the 1992 estimates appear more reliable.
380 Simon Appleton
and Rouse 1998). These studies suggest that the ability biases are not large.
The twin studies—albeit restricted to the United States—find no signifi-
cant difference in returns to education from conventional estimates. Simi-
larly, Knight and Sabot (1990) did not find a large independent effect of
their preschool ability measure in urban wage determination in Kenya and
Tanzania in 1980 (see also Glewwe 1996; Moll 1998).
A more serious limitation of cross-sectional estimates is that they provide
only a snapshot picture of current returns, when in reality returns to educa-
tion accrue over decades. Moreover, nonmarginal changes in the provision
of education—such as UPE—will reduce the scarcity value of education and
lower its returns. For example, the expansion of secondary schooling in Kenya
appears to have dramatically lowered conventional estimates of returns to
education during the last two decades (Appleton, Bigsten, and Kulundu
Manda 1999).14 If the Kenyan experience is typical, and the verdict is still out
on this, it may help reconcile the large social returns based largely on pre-
1980s data (Psacharopoulos 1994) with the more modest Mincerian returns
found in Sub-Saharan Africa in more recent studies. This caveat must be borne
in mind when interpreting the results presented later in this section.
This study goes beyond the conventional approach of estimating the ben-
efits of education in terms of wage earnings. In Uganda and many other de-
veloping countries, most workers are self-employed; only a minority of the
labor force is in wage employment. In such a context positive correlations
between wages and education do not necessarily reflect productivity effects
from education. On average, wage employees who are more educated re-
ceive higher wages in Uganda as in most other labor markets, but it is less
clear whether more education benefits farmers or self-employed workers.
Existing estimates of the returns to education in Uganda imply lower rates of
return in agriculture than in wage employment.15 For this reason a broader
approach to returns in terms of income-generating activities is taken—wage
employment, farming, and nonfarm self-employment—using the household
rather than the individual as the unit of analysis. In the case of self-
employment, this approach overcomes the problem of assigning individual
earnings when more than one member of a household works in a household
enterprise.16 Therefore, individually assigned wage earnings are aggregated
14. Primary returns do not seem to have been affected, although conventionally
estimated returns to primary education are of limited relevance in Kenya, because all
recent cohorts of urban wage employees have primary education. Returns to tertiary
education in Kenya have also not fallen, and may even have risen.
15. Four years of primary education are associated with a 7 percent rise in agri-
cultural productivity (Appleton and Balihuta 1996). This rate of return is typical of
developing countries (Phillips 1994).
16. Although the survey reports individual income, it makes a rather unconvinc-
ing distinction between unpaid helpers on family enterprises and the self-employed.
It also assigns income equally among household members working on an enterprise.
to the household level for ease of comparison with earnings from self-
employment and farming.
Reduced Form Estimates of the Return to Education

One simple approach to estimating the returns to education is a reduced
form approach. Household income is modeled as a function of the educa-
tion of adult household members and other exogenous determinants of
earnings. The focus is on the household’s earned income, the sum of earn-
ings from wage employment, and farming and nonfarm self-employment.
The household education measure is the average education of adult non-
students (students are excluded, as they are unlikely to be contributing
significantly to household income), with a distinction between average
years of primary education, average years of secondary education, and
attendance at university. We also include as an explanatory variable the
proportion of nonstudent household adults who went to university (be-
cause data on years of university education are not available). The aver-
age age of the adults and the proportion of women are included as con-
trols. Other hypothesized determinants of earnings include quantities of
the household factors of production: labor (number of adult nonstudents),
cultivable land, and productive capital. Although the household’s hold-
ing of the factors of production could be considered endogenous, these
factors are treated as exogenous due to a lack of good instruments. We
include controls for whether a woman heads the household, how many
years the household has lived in the area, and whether the father of the
household head was a farmer.
The coefficient on average years of primary education is 0.043 (see table
12.2). This implies that an extra year of primary education for each nonstu-
dent adult in a household is associated with earned income that is 4.3 per-
cent higher, other things being equal. A year of secondary education brings a
greater increment to earnings than a year of primary education. We cannot
precisely estimate the increment from a year at university. However, assum-
ing university attendance takes three to four years, the increment per year is
larger than that of schooling.
These results would imply that the rate of return is higher for postprimary
education if we make the Mincerian assumptions that there are no pecuniary
costs to education and that the opportunity costs are foregone adult earnings.
These assumptions are not useful, however, when comparing the returns to
different levels of education. Pecuniary costs are higher for postprimary edu-
cation, particularly university education. Opportunity costs are also likely to
be higher for postprimary education. Indeed, attending primary school may
not lead to a significant loss of earnings—the students may be too young to be
generating significant income outside of school. The opportunity costs of edu-
cation depend partly on the productivity of child labor. Child wages for agri-
cultural work in Uganda are less than half of the adult wage. However, few
children work for wages and a more relevant estimate of productivity may be
382 Simon Appleton
Table 12.2. Reduced Form Household Earnings Functions with

Community-Level Fixed Effects
Variable Coefficient
Characteristics of household workers
Average years of primary education 0.043a
Average years of secondary education 0.091a
Average been to university 0.440a
Average age 0.0457a
Average age squared –0.000591a
Proportion women 0.155a
Factors of production (quantities)
Log number of household workers 0.489a
Log capital 0.042a
Log cultivable land 0.273a
Other determinants
Log years resident in location 0.011
Female-headed household –0.262a
Head’s father had nonagricultural work 0.054a
Note: Controls for missing values of land and capital not reported.
gained from analysis of the marginal products to family labor.17 Research ex-
tending the analysis of household earnings from agriculture (discussed later)
to disaggregate labor into adult and child labor suggests that child labor can
be just as productive as adult labor on family farms (Angemi 1999).18 How-
ever, children of primary school age who are not enrolled in school typically
do not work full time. Therefore, the household income foregone by those at-
tending school is likely to be substantially less than a full-time wage (or mar-
ginal product).19 For example, in the 1992/93 survey, only 38 percent of chil-
dren ages 7 to 14 not attending school reported helping with family enterprises
(almost exclusively farms) and virtually none worked for wages. Of the third
who did work on the farm, the average number of hours worked per week
17. Out of 10,459 children aged 7 to 14 covered by the integrated household sur-
vey of 1992/93, only 52 worked for wages and had usable data on wage rates.
18. Ordinary least squares estimates imply that adult labor is approximately 10
percent more productive than child labor. When child labor is instrumented for, it
appears twice as productive as adult labor.
19. From a welfare standpoint, labor supply considerations would not matter if
one valued the child’s leisure at their marginal productivity, but such a valuation is
controversial.
was 33. Conversely, 22 percent of children in school helped with household

enterprises, working, on average, 16 hours per week. A simple comparison of
these statistics implies that school attendance reduces the amount of child la-
bor by only about eight hours per child per week.
This is probably an underestimate, because the study fails to control for
age differences between children in and out of school, and does not consider
work on nonincome-generating activities, such as domestic work. However,
the comparison does suggest that the Mincerian assumption—that the op-
portunity cost of primary school is a full-time wage (or marginal product)—
is inappropriate. Given a typical working week of 40 hours, the Mincerian
assumption overstates the opportunity cost of schooling by a factor of five
(40 ÷ 8 hours of child labor lost). Conversely, the true monetary returns to
primary education may be five times greater than the 4 percent productivity
benefit estimated. What this suggests is that although primary education
should not be expected to give a large boost to output, nonetheless, it may be
an attractive investment, even from a narrowly monetary perspective.20
As expected, all three factors of production—labor, capital, and land—
have a significant positive effect on household earned income. A house-
hold with more adults is associated with higher earnings, but the increase
is not proportional. The elasticity is around 0.5, implying that doubling the
number of household adults reduces their average earnings by around a
quarter. The stock of productive capital held by the household has a rela-
tively small coefficient. However, the median level of capital is low, rela-
tive to median earnings, so the coefficient implies an extremely high rate of
return to physical capital.21
Holdings of cultivable land have a significant positive association with
earnings. Aside from education, a number of other characteristics of house-
hold workers affect earnings. An inverse U-shaped relation exists between
household earned income and the average age of the adults. The turning
point of the relationship occurs at age 39. Up to that point, household earn-
ings rise with the average age of their adults; thereafter, they fall.
We obtain mixed results relating to gender and earnings. Other things
being equal, a higher proportion of adult women is associated with higher
earnings, but a female household head is associated with 23 percent lower
earnings. The latter results echo the findings of an earlier study of female-
headed households in Uganda using the same data set (Appleton 1996).
Female-headed households as defined in the survey include some de facto
20. Further adjustments would be required for the pecuniary costs of primary
education and the fact that recipients do not have infinite lives. However, the rate of
return is likely to remain reasonable even after these adjustments.
21. Median earnings are U Sh 343,200 per year, and median holdings of produc-
tive capital are U Sh 6,200. Together with the coefficient on the log of capital in the
reduced form, this implies a 232 percent return to capital (0.042 x 343,200/6,200).
384 Simon Appleton
women-headed households that receive substantial remittances, sometimes

from migrant husbands. As a group, female-headed households in the sur-
vey have lower earned incomes than male-headed households do, although
high remittance receipts prevent them from having lower total household
income and expenditure. Among the other variables included, there is no
effect of length of residence on earnings. Lastly, if the father of the household
head is engaged in nonagricultural work, the prediction is that total earnings
will be 5 percent higher.
The reduced form results provide a simple overall assessment of how
education is associated with higher earnings, controlling for household en-
dowments of factors of production and various characteristics. It does not
reveal the channels or mechanisms through which education raises income.
One channel is through education raising productivity within particular
income-generating activities. Such direct productivity effects can be estimated
through earnings (or production) functions for particular activities, for ex-
ample, wage employment or farming. A second channel is through educa-
tion, increasing the likelihood of the household engaging in higher return
activities or “entry effects,” because education is hypothesized to affect the
probability of a household entering particular sectors.
In what follows we try to estimate the various effects of education. One
motivation is to compare conventional estimates of returns to education based
on wage earnings with broader estimates. Do we obtain misleading results by
focusing solely on wage earnings? Are returns to education lower in agricul-
ture and nonfarm self-employment than in wage employment? These factors
will be important in assessing the benefits of education to children in rural
areas where opportunities for wage employment are limited. A second moti-
vation is to assess whether many of the benefits of education come in the form
of access to wage employment. For example, take the extreme case where edu-
cation does not raise returns in either farming or wage employment, but merely
allows workers to enter the higher return wage sector. In such a case, the pri-
vate benefits of education may not lead to corresponding social benefits.22
Entry Effects
This section decomposes the effect of education in entry effects and direct
productivity effects. The decomposition of entry effects identifies three house-
hold income-generating activities: wage employment, farm self-employment,
and nonfarm self-employment. It is assumed that the income-generating ac-
tivities for a household depend on the number of adult members, their edu-
cation, their other characteristics (age and sex), the parental background of
the household head, and the region in which the household lives. Adults are
22. Much would depend on whether education increases total employment in

the higher-return wage sector or merely rations a given number of jobs.
defined as those over the age of 15 who are not full-time students.23 We did
not include household holdings of land and productive assets, as these are
endogenous with respect to the household’s engaging in a particular activ-
ity. Independent probits are used to model whether a household earns in-
come from a particular activity.24 Table A12.2 reports the full results. Table
12.3 reports some predictions of the model evaluating at the population-
weighted mean of the all the explanatory variables.
Table 12.3. Probabilities of Engaging in Income-Generating Activities
Nonagricultural Wage
Category Farming self-employment employment
Baseline (mean of all variables) 92 27 33
Characteristics of all adult household
members (nonstudents)
No education 94 23 29
Complete primary 91 33 31
Four years secondary 78 22 60
All men 84 22 53
All women 96 32 19
One adult 85 23 27
Three adults 95 31 38
Occupation of father of household
head
Farmer 94 26 29
Nonagricultural self-employed 91 36 30
Government employee 93 25 39
Private employee 89 27 38
Other variables
Male headed 92 27 31
Female headed 89 28 38
10 years resident in area 89 28 36
50 years resident in area 95 25 27
Note: Predictions from probit models evaluating at the mean of the explanatory variables.
Also controlled for, but not reported, are dummies for location (region by urban-rural), for parental
education, and for missing values. Sample size: 9,078.
23. One could argue that adult nonstudent members are endogenous in this model.
However, we do not have good instruments for educational attendance.
24. The use of independent probits is a simplification. An alternative approach
would be to model the choices to enter each activity jointly, for example, using a multi-
nomial logit. Households could be modeled as falling into one of six categories: farm
only, nonfarm self-employment only, wage employment only, farm and nonfarm
386 Simon Appleton
In Uganda, primary education alone appears to do little to increase ac-

cess to wage employment. Average primary education of the adults has no
significant effect on the probability of receiving income from wage employ-
ment. However, primary education significantly reduces the probability of
the household receiving any income from farming and increases the prob-
ability of receiving income from nonfarm self-employment. The latter effect
is large. At the mean of the other explanatory variables, if the household has
no adults with primary education, it has only a 22 percent probability of
obtaining income from nonfarm self-employment. If all the adults in the
household have primary education, the probability of engaging in nonfarm
self-employment rises to 33 percent. By contrast, secondary education has
powerful effects on the probability of obtaining income from wage employ-
ment but reduces the probability of receiving income from nonfarm self-
employment and farming. Table 12.3 shows that households where all adults
have a secondary education would be twice as likely as uneducated house-
holds to receive some wage income, other things being equal.
The other determinants of participation in activities are worth mention-
ing, although they are not the primary focus of this chapter. For all three ac-
tivities, the probability of receiving nonfarm earned income rises with the
number of workers in the household. This may reflect some benefit in re-
duced risk from the diversification of income made easier with several work-
ers. Given an underdeveloped land market, there may also be limits to the
amount of family labor that can be gainfully employed on a family farm, so
that additional workers must look for employment elsewhere. The sex ratio
among adults in the household affects participation in different activities. An
increase in the proportion of women workers in the household is associated
with a rise in the probability of receiving self-employment income, including
farming, and a fall in the probability of receiving income from wage employ-
ment. Comparing an otherwise average household composed entirely of
women with one composed entirely of men, table 12.3 shows that the women-
only household is nearly 50 percent more likely to engage in nonfarm self-
employment, but only 40 percent as likely to obtain wage income. This may
reflect the situation that self-employment is more compatible with child rear-
ing or, alternatively, it may reflect discrimination in employment. Neverthe-
less, having a female head reduces the probability of receiving income from
farming and increases the probability of receiving income from wage employ-
ment. This may reflect an endogeneity bias: women may be more able to head
a household if employed. Alternatively, problems with women owning land
may limit the feasibility of farming in female-headed households. The aver-
age age of workers in the household enters as an inverse U-shaped quadratic
self-employment, self-employment and wage employment, and engagement in all

three types of activity. We use the independent probit approach for simplicity, be-
cause distinguishing between all six categories is not the focus of the chapter.
in all three probits. The turning point of the quadratic for the probit for farm-
ing is so high (97 years), however, that age effectively has a monotonic posi-
tive effect on the probability of the household farming. The turning points for
the quadratics for nonfarm self-employment and wage employment are 35
and 38 years, respectively.
Extended residence in a particular area is positively associated with farm-
ing and negatively associated with both nonfarm activities, especially wage-
employment.25 The main occupation of the household head’s father exerts an
independent effect on the activities of the household. If the head’s father was
self-employed in nonagricultural work, it raises the probability of the house-
hold receiving an income from nonagricultural work, other things being equal,
and lowers the probability of it engaging in farming. If the household head’s
father was employed by government or the private sector, the probability of
the household’s receiving income from wage employment increases.
Productivity Effects
This section models earnings from household activities. Factors of production
used to estimate a Cobb-Douglas production function for agriculture include
labor, land, and capital.26 The function also controls for the characteristics of
the household members working in agriculture and cluster fixed effects.27 Earn-
ings from nonagricultural self-employment are similarly modeled using a pro-
duction function, in which any land among the business assets of the enter-
prise is included in capital. We cannot estimate earnings from wage employment
as a production function per se, because it must be estimated at the firm level.
Instead, we model household earnings from wage employment as a function
of labor input and characteristics of the workers.28 The estimates are made af-
ter allowing for community-level fixed effects and for the endogeneity of both
labor input and the characteristics of the workers. As instruments we use the
25. One could make a strong case for a reverse causation interpretation here.
Households are likely to migrate in order to obtain wage employment.
26. We do not include variable inputs such as seeds, fertilizer, and pesticides,
because these variables are endogenous, and we lack good household-level instru-
ments for them. Part of the effect of education and other factors may work via use of
variable inputs (see Appleton and Balihuta 1996).
27. Given that the sample was drawn from many different areas, there may be
differences in location conditions that affect earnings. For example, some clusters
may enjoy better agroclimatic conditions for farming; others may enjoy higher de-
mand for nonagricultural labor. One way to control for such differences is to allow
for unobserved differences in mean earnings between clusters. These differences are
sometimes termed cluster fixed effects.
28. Including enterprise capital may lower the return to education in the earn-
ings function (see Bigsten and others 2000). The private returns to worker education,
however, are those estimated without controlling for enterprise capital.
388 Simon Appleton
number of adult nonstudents in the household and their characteristics. That

is to say, we take the household’s endowment of labor and its characteristics as
given, but model the allocation across activities as endogenous. In many cases,
allowing for endogeneity does not alter the results markedly. Often worker
characteristics in the household map almost one-to-one onto worker charac-
teristics for income-generating activities. In general, the qualitative results are
fairly robust to controls for community-level fixed effects and for endogeneity.29
As with the reduced form earnings function, treating capital and land as en-
dogenous is not possible in the absence of appropriate instruments. It could be
argued that capital and land holdings change slowly and, hence, are less sub-
ject to short-run endogeneity problems than, for example, labor allocation. We
also make no control for the selectivity of activity choice because we cannot
identify a priori any factors that may affect choice of activity that may not also
influence returns within that activity.30
Table 12.4 estimates the determinants of earnings from each activity for the
subsamples receiving any income from such activities. The similarity in the
estimated effects of education on returns in all three activities is striking. Each
average year of primary schooling of the household workers raises earnings
from both farming and wage employment by 4 percent; for secondary school-
ing, the corresponding increases are approximately 6 percent. If all household
workers had been to college, returns to both farming and wage employment
would be more than 40 percent higher. The returns to nonfarm self-
employment are broadly similar: somewhat larger for secondary schooling and
smaller for university. The rough similarity between the effect of education
earnings functions for the wage employed and the nonagricultural self-em-
ployed has also been found for samples from urban Kenya in 1978 and 1986
(Appleton, Bigsten, and Kulundu Manda 1999). Many other studies, however,
have found stronger effects of education on returns within nonfarm activities
than from on-farm activities (see, for example, Fafchamps and Quisumbing
1999). Particularly stark is the contrast between the findings of Appleton and
29. Controlling for community-level fixed effects reduces the estimated effect of
education in agriculture, increases it in nonfarm self-employment, and has no effect
in wage employment. Controlling for the endogeneity of worker education raises the
effect of primary schooling in all cases. For secondary education, the effects of con-
trolling for endogeneity are more varied: lowering returns in wage employment, rais-
ing them in farming, and having no effect in nonfarm self-employment. Perhaps the
most noticeable effect of endogenizing labor and its characteristics is to increase the
coefficient on the labor-input variable in all three activities.
30. The occupation and education of the household head are perhaps the most
promising instruments for activity choice. We have seen in the previous section that
these variables do affect the probability of a household engaging in different activi-
ties. However, a priori, it is hard to rule out productivity effects. For example, paren-
tal education may enhance children’s learning in school, while children may become
proficient in a trade by learning from their parents.
Table 12.4. Household Earnings Functions with Community-Level

Fixed Effects and Endogenous Labor Variables
Nonagricultural
Farming self-employment Wage employment
Category earnings (log) earnings (log) earnings (log)
Characteristics of
household workers
Average years primary ^ 0.038b 0.056b 0.041b
Average years
secondary ^ 0.058b 0.073b 0.057b
Proportion been to
university ^ 0.426b 0.278 0.424b
Average age ^ 0.0259b 0.0568b 0.0338b
Average age squared ^ –0.000341b –0.000713b –0.000476b
Proportion women ^ 0.152b 0.314a 0.420a
Factors of production
(quantities)
Log hours of work ^ 0.552b 0.673b 0.579b
Log capital 0.091b 0.027a n.a.
Log cultivable land 0.261b n.a. n.a.
Other determinants
Log age of enterprise 0.031b (-) n.a.
Log years resident in
location 0.054b (-) 0.001
Female-headed
household (-) –0.394b –0.488b
Head’s father had
nonagricultural work (-) (-) 0.030
^ Treated as endogenous.
(-) Not included due to insignificance.
Note: Controls for missing values of land and capital not reported.
Source: Author’s calculations from 1992 Integrated Household Survey.
Balihuta (1996) and the crop production functions estimated here, because both
were based on the same data set. Appleton and Balihuta discovered a zero
effect of secondary education and modest returns to primary education (2.8
percent). This apparent discrepancy is discussed later.
The average age of workers has an inverse U-shape in all earnings func-
tions, with returns peaking shortly after age 35 (38 in farming, 40 in nonfarm
self-employment, and 36 in wage employment). Surprisingly, the proportion
of women workers positively affects returns, although this finding is one of
390 Simon Appleton
the few that is not particularly robust to the estimation method. Without con-
trolling for endogeneity, women appear less productive than men in all three
activities. The apparent endogeneity bias suggests that households relying
on the labor of women face unobservable factors that are less favorable to
generating income. Female-headed households appear to receive much less
income, other things being equal, from the nonagricultural activities they
engage in. The labor input variable is also fairly sensitive to estimation
method, having a markedly lower coefficient when treated as exogenous.
Again, this suggests that households work more when unobservables deter-
mining income are unfavorable. This may seem counterintuitive; we might
expect higher labor input when returns to labor are higher. However, where
income and consumption are not separable, the finding may reflect income
effects on the supply of family labor.
Of the nonlabor determinants, capital has a rather low earnings elasticity
in both agricultural and nonagricultural earnings functions (0.09 and 0.03,
respectively). Land has an agricultural earnings elasticity of 0.26. Unlike
Benjamin’s (1992) findings for Thailand, controlling for community-fixed ef-
fects does not noticeably alter the estimated productivity of land. Following
Deininger and Okidi (chapter 5 in this volume), we have included variables
for the age of the enterprise and years of residence in the location as proxies
of informal human capital accumulation in farming. Similar to Deininger
and Okidi, both are positive and significant in raising agricultural earnings.
These two variables did not, however, significantly affect returns within
nonagricultural activities.31 We also tried including whether the household
head’s father had been a farmer. Although this variable is positive and sig-
nificant in regressions where labor is measured by number of workers, the
effect is effectively zero when labor is measured in hours worked. This sug-
gests that the variable works by raising labor input to the farm, rather than
by raising total factor productivity.
Putting It All Together

Now that we have estimates on how education affects the type of income-
generating activity a household engages in and how it affects returns within
these activities, we can use this information to analyze the overall effect of
education. We use a method similar to Fafchamps and Quisumbing (1999),
who studied rural households in four districts of Pakistan. They looked at di-
rect productivity effects of education in both wages and agriculture, together
31. We first estimated a general model including all explanatory variables. We

excluded some variables that were wholly insignificant if the variables were not of
great interest a priori. The exclusions did not materially affect the coefficients on the
remaining variables.
with the effect of education in reallocating labor between these activities.32 Table
12.5 reports the decompositions of the effects of primary and secondary edu-
cation. In both cases, we look at the outcome of giving all adults in the house-
hold an extra year of schooling. We assume that the models previously esti-
mated would continue to be valid after expanding education, so implicitly we
are concerned with a marginal expansion of education. This is a serious limita-
tion to the analysis, because a larger-scale expansion—such as that initiated by
UPE—is likely to alter both the probabilities (probits) for participation and
returns within activities. However, it is hard to factor in this effect given that
our data provides only a snapshot of Uganda in 1992/93.
Consider first the effect of primary education on the probability of house-
holds engaging in different income-generating activity (table 12.5, row 2). Pri-
mary education reduces the probability of a household receiving income from
farming and increases the probability of receiving nonfarm earnings, especially
from self-employment. The key point is that the changes in the probabilities do
not sum to zero. Primary education increases the probability of a household
receiving nonfarm earnings by twice as much as it reduces the probability of
receiving earnings from farming. For this reason, the overall entry effects of pri-
mary education are positive. These effects are given in row 3, by weighting the
marginal effects (row 2) by the average earnings of those engaged in each sector
(row 1). Entry effects account for just over one-fifth of the overall return to pri-
mary education (row 11). This implies that even if primary schooling had no
direct productivity effects, it would raise household earnings by encouraging
households to engage in nonfarm self-employment. Surprisingly, the overall entry
effects of secondary schooling are less pronounced. It is true that secondary edu-
cation greatly increases the likelihood of a household receiving wage earnings;
however, this is almost fully offset by reductions in the probability of receiving
earnings from farming and nonfarm self-employment. There is no support for
the hypothesis that much of the return to secondary education in Uganda comes
from switching people into wage employment out of other activities.
32. Fafchamps and Quisumbing (1999) found no productivity effects of educa-

tion in agriculture, but they did find substantial labor allocation effects. In their analy-
sis, the effect of education in reallocating labor from farming into wage employment
accounts for about one-quarter of the total effect of education on household earnings.
They did not consider the effects of education in determining whether a household
receives any income at all from a particular activity. That is to say, they do not allow
for the entry effects of education laid out in this chapter. Such entry effects may or may
not be significant in Pakistan, but they clearly are significant in Uganda. Education
has some consequence on earnings by increasing the probability of households ob-
taining off-farm income. These entry effects are distinct from the effects of education
in reallocating labor between activities. Other related studies include Coulombe and
McKay (1996) and Vijverberg (1993).
Table 12.5. Decomposing the Effect of Education on Expected Household Earnings
Nonagricultural Wage Total earned

Category Farming self-employment employment income
1 Mean conditional earnings (U Sh) 305,650 419,176 336,277 482,015
2 Effect on probability of receiving income (percent) p : –0.9 p : 1.6 p : 0.4 n.a.
s : –3.6 s : –2.6 s : 6.7
3 Entry effect (U Sh) = (1) x (2) p : –2,742 p : 6,695 p : 1,453 p : 5,406
s : –11,113 s : –10,765 s : 22,588 s: 710
4 Mean probability receiving income (percent) 83.26 27.64 33.20 n.a.
5 Productivity effect directly via education (percent) p : 3.5 p : 5.1 p : 4.0 n.a.
s : 4.7 s : 7.5 s : 6.1
6 Productivity effect via labor supply (percent) p : –0.7 p : 1.4 p : 1.7 n.a.
s : –4.6 s : 2.2 s : 3.3
392
7 Productivity effect via other worker characteristics (percent) p : –0.0 p : 0.1 p : 0.2 n.a.
s : –0.3 s : 0.4 s : 1.5
8 Percent effect on mean conditional earnings: = (5) + (6) + (7) p : 2.8 p : 6.7 p : 5.9 n.a.
s : –0.3 s : 10.1 s : 10.9
9 Weighted productivity effect (U Sh) = (4) x (8) x (1) p : 7,042 p : 7,724 p : 6,617 p : 21,383
s : –658 s : 11,726 s : 12,132 s : 23,200
10 Total effect (U Sh) = (3) + (9) p : 4,300 p : 14,419 p : 8,069 p : 26,789
s : –11,771 s : 961 s : 34,719 s : 23,910
11 Percent total effect = (10)/(1) p : 5.6
s : 5.0
p : Effect of increasing the average amount of primary education held by adult nonstudents in the household by one year
s : Corresponding effect for secondary education.
Secondary education appears to bring benefits by raising returns within

activities rather than by allowing households to enter higher-return activi-
ties. The direct productivity effects of education are given in row 5. These
effects depend heavily on the educational coefficients estimated in the three
earnings functions in table 12.4.33 However, raising education also has indi-
rect effects on productivity by altering the hours spent in different activi-
ties (row 6) and the noneducational characteristics of the workers engaged
in different activities (row 7). The latter effects are typically small. One ex-
ception is the effect of secondary schooling on the characteristics of wage
employees, which is driven by secondary schooling substantially increas-
ing female wage employment. However, the former—labor allocation—ef-
fects are substantial. These labor allocation effects broadly mirror the entry
effects discussed earlier. Primary education increases the amount of hours
a household devotes to off-farm work at the expense of farming. Secondary
education increases time spent in wage employment at the expense of both
farming and nonagricultural self-employment.34 The distinction between
these labor allocation effects and the entry effects is that the labor alloca-
tion effects are conditional on the household’s activity choice. For example,
the negative labor allocation effects of secondary education on farming show
that, even if households continue to farm, secondary education will reduce
farm earnings by reducing labor input to the farm. Interestingly, this nega-
tive labor allocation effect almost cancels out the positive direct effect of
secondary education on farm earnings. Consequently, secondary schooling
appears to have almost no effect on conditional earnings from agriculture
and, in fact, lowers them marginally (see row 8). Conversely, the indirect
effect of secondary education in increasing household labor allocated to
wage employment amplifies the direct productivity benefits by over 50
percent. Even for primary schooling, the effect on agricultural earnings is
only half of the effect on nonfarm earnings. Secondary schooling appears
to have substantially larger effects than primary schooling on returns within
nonagricultural self-employment and wage employment. These discrep-
ancies are largely attributable to the labor allocation effects of education.
33. Typically, the education of all workers raises the education of workers in a
particular activity on an almost one-to-one basis. The direct effect of secondary edu-
cation on agriculture is the main exception. Increases in the secondary schooling of
all household workers is predicted to lead to proportionately smaller increases in the
secondary schooling of those household workers allocated to work on the farm.
34. The only difference in the sign of entry and labor allocation effects concerns
secondary education and nonfarm self-employment. Secondary education reduces
the likelihood of a household engaging in nonfarm self-employment (a negative en-
try effect). However, if a household does engage in nonfarm self-employment, sec-
ondary education increases the amount of labor allocated to it, creating a positive
labor allocation effect.
394 Simon Appleton
One of the surprising results of the earnings functions in table 12.4 was the
finding that education had comparable direct productivity effects in agricul-
ture to those in nonfarm self-employment and wage employment. This is in
contrast to most of the literature on the returns to education, which tends to
find more modest effects of education on agriculture than on wage employ-
ment. For example, on the same data set, Appleton and Balihuta (1996) and
table 12.5 report that an extra year of primary education for each farmer raised
agricultural production by 2.8 percent and that secondary education appeared
to have no effect. The decomposition exercise in table 12.5 is able to explain
this apparent contradiction. In particular, we can see that the overall produc-
tivity effects of education on agricultural earnings (table 12.5, row 8) are close
to those estimated on the same data set by Appleton and Balihuta (1996). Many
differences exist between the agricultural earnings function in table 12.4 and
the crop production estimated by Appleton and Balihuta (1996). The depen-
dent variable is different (agricultural earnings compared to gross crop out-
put, the functional form is different (Cobb-Douglas compared to translog), the
exogeneity assumptions are different (education and worker characteristics
are treated as endogenous here and not in Appleton and Balihuta 1996), and
some of the determinants are also different. Some of these differences—par-
ticularly regarding the dependent variable and endogeneity—do matter for
the estimated effects of education. However, perhaps the most important point
for the present purposes is that Appleton and Balihuta (1996) measured labor
input by number of workers rather than hours of work. Secondary education
lowers the amount of hours worked on a farm more than the number of work-
ers. Consequently, when the number of workers is controlled for in a pro-
duction or earnings function, secondary education appears less directly ben-
eficial than if the number of hours worked is controlled for. In particular, if
the agricultural earnings function in table 12.4 is estimated with labor input
measured in workers rather than hours, the coefficient on average years of
secondary education falls from a highly insignificant 5.6 percent to an insig-
nificant 1.9 percent.35 As most studies of the impact of education on agricul-
tural productivity tend to measure labor input in workers rather than hours,
these raise the possibility that the direct productivity effects of education on
agriculture have been substantially underestimated.
Examining the combined entry and labor input effects on earnings is in-
teresting because the distinction is somewhat arbitrary (both revolve around
the effects of education on labor allocation between activities). At the pri-
mary level, the combined effect is substantial and accounts for approximately
two-fifths of the total effect of primary schooling on expected household earn-
ings. This is due, in roughly equal parts, to entry and labor allocation effects.
35. Surprisingly the labor-input coefficient is entirely robust to its measurement

(remaining at 0.37 under both specifications) as are many other variables. The one
exception, whether the household head’s father was a farmer, only has an effect when
labor input is measured in number of workers, not hours worked.
This implies that studies of the impact of primary education that do not ac-
count for these effects—for example, conventional estimates of rates of re-
turn based on wage earnings—seriously underestimate the benefits. In con-
trast to primary schooling, the combined effects are negative and reduce the
total effect of secondary education on expected household earnings by one-
fifth of what it would be otherwise.36
Effects of UPE on School Quality

Uganda did not experience the postindependence educational expansion
characteristic of most Sub-Saharan African countries. Official statistics on
school enrollment ratios in Uganda appear particularly problematic, but,
as far as we can rely on them, they show no sustained rise in the two de-
cades after independence.37 The gross primary school enrollment ratio in
1980 was 50 percent, effectively the same as in 1960. By contrast, the other
Sub-Saharan African countries for which data are available almost doubled
their primary school enrollment ratios from 40 to 77 percent.38 The country’s
poor record on education does not appear to be wholly attributable to the
Amin years in the 1970s—there was no sustained rise in enrollments dur-
ing the 1960s either. After Amin’s overthrow, however, Uganda caught up
with the rest of the subcontinent, which was entering a period of stagnant
enrollment rates, attaining a gross primary enrollment rate of 73 percent in
1985. Thereafter, official enrollment rates did not increase, remaining at 73
percent in 1995. Secondary enrollment rates rose slightly from 1960 to 1980
(from 3 to 5 percent). Rates then doubled to 10 percent in 1985, but in 1995
only stood at 12 percent.
Consequently, in terms of official statistics, the first decade of the Museveni
government appears to have achieved little in terms of school enrollment,
36. We notice that the total estimated effect of education—particularly secondary

education—is somewhat lower using this structural approach than when using the
reduced form model reported in table 12.3. This seems to be due to a violation of the
assumption of log-normality of the error terms in earnings functions. In particular, if
the earnings functions are estimated using a linear, rather than log-linear, functional
form, the correspondence between the structural and reduced form estimates of the
education is mathematically exact.
37. The 1992 integrated household survey implied much higher enrollment fig-
ures than those officially reported, with the gross primary enrollment ratio being es-
timated at 93 percent compared with an official figure of 73 percent (World Bank
1996). A survey of 250 government schools in 19 districts in 1996 implied a 60 percent
increase in primary enrollments between 1991 and 1995, while official enrollment
rates were stagnant (chapter 11 in this volume). Even the 73 percent official gross
primary enrollment ratio is hard to reconcile with the reported doubling of primary
school enrollments during UPE.
38. Sub-Saharan African figures are the cross-country average from 39 states, in-
cluding South Africa (World Bank 1998).
396 Simon Appleton
especially at the primary level.39 However, these quantitative indicators may

provide an incomplete picture. It is widely argued that the educational sys-
tem in Uganda had a high reputation for quality at independence, but this
was destroyed during the chaos of the 1970s, partly through decaying school
infrastructure and partly through the exile of many well-educated Ugandans.
The first decade of the Museveni government had seen a period of educa-
tional reconstruction that partially restored the quality of services.
The situation changed dramatically during the campaign for 1996 elec-
tions, when the incumbent, President Museveni, promised to provide free
primary education to four children in every family. Although the govern-
ment of Uganda had long declared the attainment of universal primary
education a policy goal (for example, in the 1992 “White Paper on Educa-
tion”), this promise was the first significant step toward attaining that goal.
Following his re-election, President Museveni addressed the nation in De-
cember 1996 and announced that he would implement his election promise
starting in January 1997. The initial public response to this initiative was
impressive, with primary school enrollment rising from 2.9 million in 1996
to 5.3 million in 1997. The key element of the initiative has been the aboli-
tion of tuition and PTA fees (some discretion still exists in urban schools
that continue to levy fees). These fees had assumed increasing importance
in the 1970s and 1980s as state funding of education declined. By 1991 pa-
rental contributions to primary schools constituted 70 percent of total fund-
ing (43 percent at the median, see chapter 11 in this volume). Equity aspects
of the initiative include a 1:1 gender balance requirement when identifying
the four children per household to benefit from free education and funding
the education of all orphans.
The main concern about UPE is that it is likely to lead to deterioration in
the quality of education provided. At least in the short term, government
educational expenditures will not be able to rise sufficiently both to offset
the abolition of PTA fees and the consequent expansion of student numbers.
Although it is rather early to evaluate the effects of UPE in Uganda, some
interesting exploratory evidence is provided by a study of 22 primary schools
in Mukono and Kampala districts in 1998 (Otteby 1999). Otteby’s study fo-
cused on three dimensions of the impact of UPE: (a) the composition of the
student intake, (b) school quality, and (c) academic performance.40
39. Figures on tertiary enrollment rates are incomplete but show a much greater
proportionate expansion: from 0.1 percent in 1965 to 0.8 percent in 1985 and 1.5 per-
cent in 1994.
40. The Uganda National Examination Board (1999) carried out a post-UPE
testing of learning outcomes in mathematics and English using the same test
administered in 1996. These data, when analyzed, will provide a more definite
picture of the impact on learning and school quality.
How Has UPE Affected the Composition of the Student Intake?
In both the Mukono and Kampala schools, a large increase in enrollments

followed UPE: 110 percent in rural schools and 30 percent in urban
schools. Surprisingly, enrollment of boys increased more than that of girls—
partly due to higher re-entry of boys at the third year (P3) and above. At
the lower grades (P1 and P2), the proportion of girls increased following
UPE. Otteby (1999) used an indirect approach to assess how UPE had
changed the composition of the school intake in other dimensions. She
sampled 20 second-year (P2) students and 20 fifth-year (P5) students from
each school. The P2 cohort was selected to reflect a post-UPE intake, be-
cause most additional enrollments following UPE were concentrated in the
lower year groups. By contrast, students in the P5 year group had entered
school prior to UPE. (Some students may have re-entered P5 following UPE.)
A comparison of the characteristics of P2 and P5 students in 1998 should,
therefore, shed some light on how UPE has changed the composition of the
student intake. The material wealth of students’ parents was calculated us-
ing a 12-point scale measure of housing quality and possession of consumer
durables. The average wealth of those in P2 and P5 grades in urban schools—
both averaging about eight on the scale—was not markedly different. How-
ever, in rural areas, the P5 cohort averaged more than five on the wealth
scale, whereas P2 cohort averaged four. Moreover, in rural areas, those in
P2 included students with low parental wealth (two points on the scale),
whereas the P5 group had no similarly disadvantaged students. Likewise,
the proportion assigned only three or four points on the wealth scale in P2
was almost double that in P5.
How Has UPE Affected School Quality?

Otteby (1999) inquired about school quality before and after UPE. The av-
erage student–teacher ratio in rural schools after UPE rose from 30 to 51,
and in urban schools the student–teacher ratio rose from 50 to 66. How-
ever, actual class sizes were typically much larger than student–teacher ra-
tios calculated at the school level. For example, in urban schools, the student–
teacher ratio for those in P2 rose from 41 to 77, while the average class size
increased from 96 to 136. The increase in student numbers exacerbated an
existing shortage of chairs and desks. In the rural schools visited, half the
sample had no chairs for students before or after UPE. Before UPE 10 per-
cent of rural schools had enough chairs; after UPE none of them did. In
urban schools visited, the proportion reporting sufficient chairs fell from
70 percent before UPE to 31 percent after. The number of textbooks per
student did not decline; indeed, the number increased slightly in the sample
schools because of a USAID project. However, national statistics imply that
this finding is atypical.
398 Simon Appleton
How Has UPE Affected Student Performance?
Comparable test scores for pre- and post-UPE student cohorts were not avail-
able. Nevertheless, Otteby (1999) tentatively estimated the likely impact of
UPE on average student performance.
As a first step, current (post-UPE) P2 students were tested in mathemat-
ics and English. They also took a test on nonverbal reasoning designed to be
independent of schooling (Raven, Raven, and Court 1991). Performance in
the mathematics and English tests were then modeled as a function of non-
verbal reasoning and indicators of school quality. These models (or educa-
tional production functions), used in the final analysis were parsimonious.
The statistically significant variables were retained only after a stepwise elimi-
nation of other variables from a more general specification. In the final edu-
cational production functions, performance in English and mathematics de-
pended on three explanatory variables. Academic performance depended
positively on nonverbal reasoning, negatively on the student-teacher ratio,
and positively on indicators of school quality (school facilities in the case of
English, textbook-student ratios in the case of mathematics). Performance in
the tests of nonverbal reasoning, in turn, was modeled as a positive function
of parental wealth and education.
The most important finding was the negative relationship between
student-teacher ratios and performance in both English and mathematics.
The finding is noteworthy given the possible positive endogeneity bias of
good schools being oversubscribed and the observation that better-funded
urban schools have larger classes than rural schools. This finding contradicts
most of the literature on educational production functions, which more often
than not finds class size to be insignificant (Fuller 1987; Hanushek 1986).
However, nearly all the existing literature relates to class sizes below fifty
and provides little guidance on what happens when class sizes rise to the
high levels now observed in Uganda. Otteby (1999) used the estimated edu-
cational production functions to simulate the impact of academic performance
on the rise in student-teacher ratios after UPE. Consider, for example, the
estimated impact of a rise in student-teacher ratios from 41 to 77 as was ob-
served in P2 in urban schools. If this rise had not occurred, the predicted
average test scores would be 11 percent higher in mathematics and 6 percent
higher in English. Clearly, these are substantial effects and cause for concern.
Otteby’s (1999) educational production functions were used to predict
how P5 students would have scored if, pre-UPE, they had sat for the same
mathematics and English tests in P2. The purpose of this simulation is to
gauge what is likely to happen to average academic performance as a re-
sult of UPE. Clearly, prior to UPE students are likely to have scored better
in the tests than the current P2s. This is partly because of the increasing
student–teacher ratios noted earlier. However, a decline in average academic
performance is also likely for “compositional” reasons. For example, UPE
has increased enrollment in rural areas more than in urban areas, and rural
students tend to do not as well academically in Uganda. Moreover, even
within rural and urban areas, we have seen that UPE has led to greater
educational access for poorer students, who again tend to perform less well
on average. Taking all these factors into account, Otteby (1999) predicts
that, had she been able to test the P5 students when they were in P2, their
scores would have averaged 10.1 in English and 7.5 in mathematics. The
actual test scores of the post-UPE cohort currently in P2 averaged 8 in En-
glish and 6.6 in mathematics. Consequently, this simulation predicts that
UPE will lead to a fall in mean academic performance of 21 percent in En-
glish and 11 percent in mathematics.
Changes in the mean parental background of the pupils account for a
relatively small part of these simulated declines: 11 percent in English and 5
percent in mathematics. Much more important is the fact that, after UPE, a
higher proportion of students will come from schools with low indicators of
school quality. Inferior school facilities account for 70 percent of the predicted
decline in performance in English. In mathematics, 77 percent of the fall is
due to a rise in the student–teacher ratio. In English, the rise in the student-
teacher ratio accounts for 20 percent of the predicted fall in performance.
These results imply that UPE will lead to a fall in mean academic perfor-
mance, primarily through a worsening of school quality (student-teacher ra-
tios and school facilities).
The analysis of the effects of UPE on quality is indicative; such a small
sample is not nationally representative. The simulation of the likely effects of
UPE on average performance requires a number of strong assumptions.41 None-
theless, the analysis does suggest what casual reasoning would imply: that
UPE is likely to lead to an observed fall in average academic performance.
Most of this fall will be compositional. The typical student will come from a
less advantaged background. More importantly, the expansion in student num-
bers will be disproportionately concentrated in already disadvantaged rural
schools. Arguably, these compositional effects are not a cause for concern; if
average performance falls after UPE only because of these effects, no student
will be worse off. However, the estimated educational production functions
also imply that by increasing student–teacher ratios in individual schools, UPE
is likely to lead to substantial falls in academic performance.
41. These assumptions include the following: that primary school performance
in general can be captured by testing those in P2; that the cross-sectional estimates of
the parameters of the educational production function are unbiased; that UPE has
not led to a “structural break” in the educational production function; that the char-
acteristics of P5 students and their schools provide a good estimate of what the char-
acteristics of P2 students would have been without UPE; and that UPE has not al-
tered the unobservable characteristics of students and schools.
400 Simon Appleton
Summary and Conclusions
Although the data used here to model determinants of educational attain-

ment and returns to education come from the 1992 Integrated Household
Survey and were collected prior to the UPE initiative of 1997, they still pro-
vide useful insights into its likely effects. The data show that before UPE,
particular types of children were less likely to attend school: girls, children
from households with poorly educated parents; children from extremely
poor families; and children from certain regions, such as rural northern
areas. To the extent that UPE is successful, children with these types of
characteristics will be able to benefit from education.
Assessing UPE’s impact on economic efficiency is much harder than in-
ferring its equity effects. Analysis of the determinants of household earnings
suggests that for each year of education, earnings increase by about 4 per-
cent. This is a modest benefit, although it may still imply a high rate of return
if the opportunity costs of attending primary school are low. The most sur-
prising finding of the analysis is that education has similar proportional pro-
ductive benefits in all three income-generating activities: farming, nonfarm
self-employment, and wage employment. This is what one might expect if
human capital were allocated efficiently across activities. However, it does
run contrary to the common belief—and much supporting evidence—that
education is rewarded more in wage employment and brings only small re-
turns in farming. We suggest that the relatively small returns to education
conventionally found in agricultural production functions may partly arise
from a failure to control properly for the input of labor to farming. The re-
sults of the study imply that education may bring tangible benefits to the
poor in Uganda, who typically are not wage earners.
Estimates of the extent to which education brings returns by reallocating
labor rather than by direct productivity benefits were rather surprising. One
would expect a principal indirect benefit of secondary education to be in-
creased access to wage employment. However, in our decompositions this
benefit was wholly offset by the loss of income associated with withdrawal
from farming and nonfarm self-employment. Indeed, the estimates for the
combined entry effect and labor allocation effects of secondary education
were mildly negative. By contrast, an important channel through which pri-
mary education appears to benefit households is in encouraging entry to
nonfarm income-generating activities and reallocating labor out of farming.
The efficiency effects of the UPE initiative will depend partly on how it
alters the quality of education. Exploratory research of two districts in Uganda
implies that average academic performance may fall sharply under UPE. Much
of this will be purely compositional, however, as more students from disad-
vantaged backgrounds are now enrolling, and they are enrolling dispropor-
tionately in lower performing rural schools. Nonetheless, other grounds for
concern exist. Although most studies of educational production functions im-
ply no adverse effects of class sizes on academic performance, the exploratory
research reported here suggests that this generalization may not remain valid
in the context of the extremely large class sizes apparent in post-UPE Uganda.
Higher class sizes and generally stretched resources are likely to reduce the
amount children learn at school. The challenge of the UPE initiative is to com-
bat these potentially adverse consequences.
Annex 12.1. Models
Table A12.1. Multinomial Logit Model for School Attendance for

Children Ages 5–14, 1992
Dropped out of school In school

Category Coefficient t-ratio Coefficient t-ratio
Constant 2.9767 1.32 0.9710 0.45
Female –0.0110 –0.12 –0.3704 –6.57
Father literate 0.8339 2.53 0.5708 2.34
Father some primary –0.3098 –0.95 0.0461 0.19
Father full primary –0.1627 –1.43 0.3362 5.18
Father postprimary 0.1328 0.76 0.3151 3.20
Mother literate 0.2880 0.81 0.0695 0.28
Mother some primary 0.0353 0.10 0.6133 2.49
Mother full primary 0.1645 1.02 0.5189 5.78
Mother postprimary 0.7170 2.63 0.4498 2.58
Female head 0.1384 1.49 0.1672 2.89
Age of head –0.0419 –2.45 –0.0206 –1.79
Age head squared 0.0005 2.98 0.0003 2.48
Log income –0.8789 –2.20 –0.5861 –1.54
Log income squared 0.0489 2.69 0.0475 2.81
Number of boys 0.0387 1.49 0.0524 3.35
Number of girls –0.0616 –1.43 –0.0199 –0.77
Firewood –0.1144 –2.49 0.0480 1.76
Piped water –0.3890 –2.79 –0.1099 –1.23
Fees 0.3423 2.44 0.0628 0.73
PTA charges 0.0146 2.16 0.0105 2.18
Distance to primary school –0.0819 –3.59 –0.1331 –9.50
Distance to secondary school –0.0018 –1.01 –0.0009 –1.06
Distance to district
administration –0.0026 –1.94 –0.0014 –1.89
Central urban 0.8995 3.79 0.9110 5.94
Central rural 0.7606 5.08 0.9196 10.01
Western rural 0.4489 3.25 0.6694 8.31
Western urban 0.7565 3.51 0.7394 5.42
Eastern rural 0.3167 2.34 0.4948 6.29
Eastern urban 0.3569 1.72 0.4066 3.21
Northern urban 0.1418 0.75 0.3140 2.90
PTA Parent teacher association.
Note: Yearly dummies for age included in model but not reported in table.
402 Simon Appleton
Table A12.2. Probit Models for Engaging in an Income-Generating

Activity
Nonagricultural Wage
Category Farming self-employment employment
Intercept –1.779b –1.033b 0.298a
Characteristics of adult
household members
(nonstudents)
Average years primary –0.036b 0.048b 0.012
Average years secondary –0.145b –0.077b 0.185b
Average been to
university –0.065b –0.276 0.665
Average age 0.00979b 0.0261b 0.0257b
Average age squared –0.0000504b –0.000374b –0.000339b
Proportion women 0.731b 0.301b –0.939b
Log Number (lnL) 0.544b 0.220b 0.271b
Head’s father
Nonagricultural
self-employed –0.189b 0.273b 0.030
Government employee –0.022 –0.033 0.285b
Private employee –0.286b 0.010 0.251b
Other variables
Female headed –0.191b 0.017 0.194b
Log years resident in
area 0.291b –0.031a –0.170b
Note: Also controlled for, but not reported, are dummies for location (region by urban-rural),
for parental education, and for missing values. Sample size is 9,078.
References
Angemi, Diego. 1999. “Child Labor: Insights from an Agricultural House-
hold Model.” Unpublished MSc dissertation, University of Oxford,
United Kingdom.
Appleton, Simon. 1996. “Woman-Headed Households and Household Wel-
fare: An Empirical Deconstruction.” World Development 24(12): 1811–27.
_____. 1999. “Education and Health at the Household Level in Sub-Saharan
Africa.” Paper prepared for the African Economic Research
Consortium collaborative research project on explaining African eco-

nomic growth performance. Centre for the Study of African Econo-
mies, University of Oxford. Processed.
Appleton, Simon, and Arsene Balihuta. 1996. “Education and Agricultural Pro-
ductivity in Uganda.” Journal of International Development 8(3): 415–44.
Appleton, Simon, Arne Bigsten, and Damiano Kulundu Manda. 1999. “Have
Returns to Education Changed over Time? Evidence from Kenya,
1978–1995.” Centre for the Study of African Economies Working Pa-
per no. 99.6. University of Oxford, Department of Economics, Ox-
ford, United Kingdom.
Appleton, Simon, John Hoddinott, and John Knight. 1996. “Primary Educa-
tion as an Input to Postprimary Education: A Neglected Benefit.” Ox-
ford Bulletin of Economics and Statistics 58(S1): 211–19.
Ashenfelter, Orley, and Cecilia Rouse. 1998. “Income, Schooling and Ability:
Evidence from a New Sample of Identical Twins.” The Quarterly Jour-
nal of Economics CXIII(1): 253–84.
Benjamin, Dwayne 1992. “Household Composition, Labor Markets, and La-
bor Demand: Testing for Separation in Agricultural Household Mod-
els.” Econometrica 60(2): 287–322.
Bennell, Paul. 1996. “Rates of Return to Education: Does the Conventional
Pattern Prevail in Sub-Saharan Africa?” World Development 24(Janu-
ary): 183–99.
Bigsten, Arne, and Steve Kayizzi-Mugerwa. 1999. Crisis, Adjustment and
Growth in Uganda: A Study of Adaptation in an African Economy. New
York: St. Martin’s Press.
Bigsten Arne, Paul Collier, Stefan Dercon, Marcel Fafchamps, Bernard
Gauthier, J. W. Gunning, A. Isaksson, Abena Oduro, Remco
Oostendorp, Catherine Pattillo, Mans Soderbom, Francis Teal, Albert
Zeufack, and Simon Appleton. 2000. “Rates of Return on Human and
Non-Human Capital in Africa’s Manufacturing Sector.” Economic De-
velopment and Cultural Change 48(4): 801–827.
Coulombe, Harold, and Andrew McKay. 1996. “Modeling the Determinants
of Poverty in Mauritania.” World Development 24(6):1015–32.
Fafchamps, Marcel, and Agnes Quisumbing. 1999. “Human Capital, Produc-
tivity, and Labor Allocation in Rural Pakistan.” Journal of Human Re-
sources 34(2):369–406.
Filmer, Deon. 2000. “The Structure of Social Disparities in Education: Gender
and Wealth.” Policy Research Working Paper no. 2268. World Bank,
Development Research Group, Washington, D.C.
404 Simon Appleton
Fuller, Bruce. 1987. “What Factors Raise Achievement in the Third World?”
Review of Educational Research 57(3): 255–92.
Glewwe, Paul. 1996. “The Relevance of Standard Estimates of Rates of Re-
turn to Schooling for Education Policy: A Critical Assessment.” Jour-
nal of Development Economics 51(2): 267–90.
Hanushek, Eric. 1986. “The Economics of Schooling: Production and Effi-
ciency in Public Schools.” Journal of Economic Literature 24(3): 1141–77.
Jimenez, Emmanuel. 1987. Pricing Policy in the Social Sector: Cost Recovery for
Education and Health in Developing Countries. Baltimore, Maryland: The
Johns Hopkins University Press.
Knight, John. 1968. “Earnings, Employment, Education, and Income Distri-
bution in Uganda.” Bulletin of the Oxford University Institute of Econom-
ics and Statistics 30(4): 192–205.
Knight, John, and Richard Sabot. 1990. Education, Productivity, and Inequality: The
East African Natural Experiment. Oxford, U.K.: Oxford University Press.
Lanjouw, Peter, and Martin Ravallion. 1995. “Poverty and Household Size.”
Economic Journal 105(November): 1415–34.
Mincer, Jacob. 1974. Schooling, Experience, and Earnings. New York: Columbia
University Press.
Moll, Peter. 1998. “Primary Schooling, Cognitive Skills, and Wages in South
Africa.” Economica 65(May): 211–90.
Otteby, Kim. 1999. “The Effects of Universal Primary Education in Uganda.”
Unpublished undergraduate dissertation, University of Oxford, United
Kingdom.
Phillips, Joseph M. 1994. “Farmer Education and Farm E: A Meta-Analysis.”
Economic Development and Cultural Change 43(October): 149–65.
Psacharopoulos, George. 1994. “Returns to Investment in Education: a Glo-
bal Update.” World Development 22(9): 1325–44.
Raven, J., J. C. Raven, and J. H. Court. 1991. Manual for Raven’s Progressive
Matrices and Vocabulary Scales. Oxford, U.K.: Psychologists Press.
Reddy, Sanjay, and Jan Vandermoortele. 1996. “User Financing of Basic So-
cial Services.”United Nations Children’s Fund: New York.
Rosenzweig, Mark, and Kenneth Wolpin. 1986. “Evaluating the Effects of
Optimally Distributed Public Programs.” American Economic Review
76(3): 470–87.
Uganda National Examination Board. 1999. “National Assessment of Progress
in Education: Report on the Results of Mathematics and English As-
sessments in 1999.” Kampala: UNEB.
UNDP (United Nations Development Programme). 1997. Uganda Human

Development Report. Kampala.
Vijverberg, Wim. 1993. “Educational Investments and Returns for Women
and Men in Côte d’Ivoire.” Journal of Human Resources 2(4): 933–74.
World Bank. 1996. “Access to Education and Health in Uganda.” World Bank,
Africa Region, Poverty and Social Policy Department and Macroeco-
nomics 2, Washington, D.C. Processed.
_____. 1998. World Bank Development Indicators. New York: Oxford University
Press.
13
Combating Illness
Paul Hutchinson
Until the 1970s, Uganda’s health sector was considered to be one of the best
in Africa. Steady improvements had been seen in most health indicators, and
access to care was relatively high. However, from the early 1970s through the
mid-1980s, the country’s internal turmoil severely limited access to health
services and interrupted basic infrastructure development, and the level of
health spending fell dramatically. Health represented 5.3 percent of central
government expenditures in 1972, but only 2.4 percent in 1986 (World Bank
1988). By 1986 health expenditures were only 6 percent of their 1970 levels
(Macrae, Zwi, and Gilson 1996).
Since 1986 the health sector has undergone a process of rebuilding and
renovating health infrastructure. Most health indicators, except those related
to HIV/AIDS, have been improving, due in part to economic growth and
liberalization and to greater availability of health services. While still high
relative to industrial countries, infant mortality decreased from 119 to 97
deaths per 1,000 births in only a seven-year period from 1988. Use of contra-
ception has tripled; total fertility continues to decline; knowledge and aware-
ness of HIV/AIDS is now almost universal; and sexual behavior is changing,
particularly among young people (Republic of Uganda 1995; Shuey and oth-
ers 1999). Health spending now represents 7 percent of total public expendi-
tures, one of the highest proportions in Africa (Hay 1998; Republic of Uganda
2000). Even so, the health sector has faced many obstacles since 1986.
The AIDS epidemic, which emerged in Uganda at about the time the coun-
try began its recovery, added another burden to the health system. Currently,
an estimated 1 million Ugandans are infected with HIV. Cumulative AIDS
deaths are nearly 2 million, 10 percent of the current population (UNAIDS
and WHO 2000). Overall HIV prevalence may be in the 6 to 7 percent range,
down from 9 to12 percent in the early 1990s (Goliber 1999; UNAIDS and
407
408 Paul Hutchinson
WHO 2000). The effect on health indicators is considerable; life expectancy

at birth declined from approximately 54 years in the late 1970s to approxi-
mately 43 in 1995 (figure A13.1) (World Bank 1979, 1986, 1992, 1997b). Scarce
public resources that could have been used to restore the health sector or
meet other health needs have been used to address the AIDS epidemic.
Many health problems that have historically plagued Uganda continue
to limit the development of human capital. Malaria, although generally re-
ceiving less attention and fewer public funds than HIV/AIDS, is a leading
cause of morbidity and mortality (Hutchinson 1999c). Maternal and child
health has improved slowly, although both infant and maternal mortality
remains high. Child nutrition is poor, contributing to a variety of other child-
hood ailments (Republic of Uganda 1995). Beginning in 1996, the steady im-
provements in immunization coverage appear to have dramatically reversed,
affected both by decentralization and shifting international donor priorities
(DeRoeck and Levin 1998; UNEPI 1999).
Despite measurable improvements, the available health services are still
inadequate to meet the needs of the population. The capital investments of
the past decade, which have increased the population’s proximity to health
facilities, have not corresponded to improvements in the quality and avail-
ability of recurrent inputs. As a result, use of the public sector for curative
care has remained remarkably constant since the late 1980s. Many govern-
ment health units are faced with a situation of unused physical capacity, lack
of trained staff, and supply shortages (Okello and others 1998). The poor and
nonpoor alike tend to prefer curative care from nongovernmental organiza-
tions (NGOs) and private providers over supposedly less expensive govern-
ment care, although government health units outnumber all other providers
roughly two and a half to one. As demonstrated in chapter 11 in this volume,
the quality of services at government health units suffers from a poor incen-
tive structure and a lack of accountability for inputs (Hutchinson 1999b; Re-
public of Uganda 1997c).
The government’s ongoing health sector reform has attempted to address
some of the major weaknesses. Since 1993 the health sector has been under-
going a process of decentralizing responsibility for provision of health ser-
vices from the central Ministry of Health to the 45 district governments. The
impact of decentralization on health service delivery and health outcomes is
not yet clear. While decentralization has reportedly increased public partici-
pation in the health sector, new problems have arisen. The decline in child-
hood immunization coverage demonstrates the difficulties of incorporating
formerly vertical programs into a decentralized system, particularly if local
priorities differ from national ones.
Health care financing has focused mainly on generating additional rev-
enue from user fees. While official policy changed only in 1999, govern-
ment health facilities have been charging fees for most curative care and
other health services since the late 1980s. However, few instances of user
fee revenue going to improve the quality and availability of services are
Combating Illness 409
apparent. Several studies have examined the extent of informal charges for
services at government facilities, finding that they present yet another fac-
tor inhibiting the use of government health services (Jitta 1996; McPake
and others 1999; Mwesigye 1996). Health insurance is almost nonexistent,
consisting of a few pilot schemes based at individual health facilities or
high-end plans for wealthier individuals in Kampala.
The remainder of this chapter is organized as follows. The first section
looks at changes that have occurred in health policy and access to services
since the 1960s, while the next section describes the current health situation,
including the effects of some of the major health problems in Uganda: AIDS,
malaria, childhood nutrition, and reproductive health. The third section ana-
lyzes the demand for health services and the relative importance of factors
such as proximity, price, and quality. The chapter concludes with a discus-
sion of some proposed actions to address the health sector’s problems in the
future and an assessment of their likelihood of success.
Health Policy and Access to Services

Since 1986 the health sector has mostly focused on rebuilding the public sec-
tor health infrastructure and restoring basic health programs. An important
aspect of rebuilding has been decentralizing control over many health re-
sources and responsibilities to the district level. This process is incomplete.
At independence in 1962, the health system was largely focused on cura-
tive care. During the 1960s efforts were concentrated on improving primary-
level care. By the 1970s, Uganda had a highly developed network of primary-
level care, secondary hospitals, and referral hospitals. Medical personnel were
highly trained, and the quality of medical care was higher than elsewhere in
Africa (Barton and Wamai 1994).
During the 1970s the health sector almost entirely collapsed. A large propor-
tion of hospitals and health centers were destroyed. The burden of medical care
fell on the NGOs and missionary health care providers. Many of the trained
medical personnel left government employment, and many simply left the coun-
try. The consequences of the collapse were dramatic. At the start of the 1970s,
immunizations reached 70 percent of children; by the early 1980s, immuniza-
tions had dropped to 15 to 25 percent of children (Barton and Wamai 1994).
The rebuilding of the health infrastructure since 1986 has significantly
increased the population’s proximity to health units (tables 13.1 and A13.1).
A 1996 health inventory (Republic of Uganda 1997c) concluded that only 49
percent of the population were within five kilometers of a health unit offer-
ing basic curative and preventive care. The 1995 Uganda Demographic and
Health Survey (DHS) (Republic of Uganda 1995) concluded that 48 percent
of currently married women lived within five kilometers of a facility offering
prenatal care; 54 percent lived within one hour’s travel time. Expansion in
the private sector has also been considerable, though official estimates sig-
nificantly underestimate the total numbers of private providers.
Table 13.1. Number and Types of Health Facilities, Selected Years
Percentage change
Type 1965 1979 1975 1980 1988 1992 1996 1979–88 1988–96
Hospitals 50 62 69 76 81 95 98 31 21
Health centers 20 46 74 91 122 196 223 165 83
Dispensary and
410
maternity units 55 65 60 80 110 129 124 69 13
Maternity units 17 20 16 20 36 13 367 80 919
Dispensaries 83 103 92 88 160 258 603 55 277
Subdispensaries 77 110 211 293 392 649 57 256 –85
Aid posts 0 0 0 0 160 98 33 –79
Total 302 406 522 648 1,061 1,438 1,505 161 42
Note: Includes government and NGO facilities.
Source: Republic of Uganda (1997c).
The increase in the number of health facilities has not been met by a corre-
sponding increase in the number of trained medical personnel (table 13.2).
Even now, many medical students leave the country after completing their
education to work in neighboring countries where salaries have generally been
higher. As a result, while the total number of medical personnel has increased
since 1972, it has not kept pace with population growth. In 1996, one medical
person was available for every 2,346 people. In 1972 one medical person was
available for half that many people. The overall number of doctors in the coun-
try has actually declined by 18 percent (Republic of Uganda 1993, 1997c).
The distribution of medical personnel is uneven. While 90 percent of the
population live in rural areas, most of the doctors are concentrated in a few
urban areas. In 1991 Jinja, Kampala, and Mbale, with only 5 percent of the
country’s population, accounted for nearly 60 percent of the country’s doc-
tors. Eighteen of the then 39 districts had no more than five doctors. Coun-
trywide, there were 27,000 people per physician. Five districts had more than
100,000 people per physician (World Bank 1993). In 1996, 45 percent of gov-
ernment health employees worked in hospitals (Republic of Uganda 1997c).
This staffing distribution affects utilization patterns. Many individuals by-
pass lower-level facilities to use hospitals instead. A recent study found that
only 15 percent of hospital attendees had been referred from lower–level fa-
cilities (Okello and others 1998).
The quality of available health personnel is also cause for concern. Only
33 percent of established health positions are currently filled by qualified
staff. The remaining positions are filled by unqualified nursing aides or are
left vacant. A government ban on recruitment has contributed to the insuffi-
cient numbers of trained medical personnel, as have problems with timely
payment of salaries and poor attitudes toward health workers by district
leaders (Republic of Uganda 2000).
As with most government sectors, the Ministry of Health has been de-
centralizing selected health sector functions and responsibilities to the of-
fices of the district director of health services and the district health teams.
Decentralization means that districts are now the providers of health ser-
vices and are responsible for supervising district health units below the
hospital level, deciding how to allocate resources in the district health bud-
get and implementing many public health activities. The District Service
Commission is responsible for hiring and firing health personnel in the dis-
trict. In several districts, the health budget planning process involves con-
siderable input from communities via subcounty health committees. The
central ministry retains responsibility for making policies, setting standards,
and providing technical assistance.
The rationale for nationwide decentralization is largely political: to im-
prove the quality of governance and representative democracy. In the health
sector, rationales include (a) improving allocative efficiency by placing
decisionmaking and planning closer to the direct users, thereby better match-
ing the supply of health services to health needs; (b) improving technical
Table 13.2. Staffing Ratios, 1972 and 1996
1972 1996 Percentage change

(population = 10,634,000) (population = 19,500,000) between 1972 and 1996
Number Ratio of Number Ratio of Number Ratio of
Cadre of staff staff:population of staff staff:population of staff staff:population
412
Doctors 1,171 1:9,081 964 1:20,228 –18 –123
Nurses 3,877 1:2,743 4,059 1:4,804 5 –75
Midwives 1,793 1:5,931 2,624 1:7,431 46 –95
Medical assistants 435 1:24,446 664 1:29,367 53 –20
Total 7,276 1:1,462 8,311 1:2,346 14 82
Source: Republic of Uganda (1993, 1997c).
efficiency and the quality of health services by increasing local accountabil-

ity; and (c) improving the sustainability of health projects and initiatives by
increasing community participation in health activities and health planning
(Okuonzi and Lubanga 1997).
Decentralization is still in an intermediate stage in which problems could
reasonably be expected. Financial management systems have had to be
developed at the district level to ensure accountability and functional ca-
pacity for implementation. Some progress has been made, but districts still
have limited control over funding and depend on external sources for most
health expenditures. Of nonhousehold health spending, the central gov-
ernment and donors finance at least 60 to 70 percent of district health ac-
tivities (Hutchinson 1999a).
Even with the limited resources available to districts, district planners
have shown a tendency to prefer activities inconsistent with the Ministry of
Health strategy, in particular, constructing new health facilities rather than
providing needed public health activities. Central government concern over
undesirable resource allocation patterns led to the establishment of a condi-
tional grant for primary health care in 1997/98. However, even the central
ministry has tied much of this funding to upgrading health centers so that
they can provide more extensive curative care (Hutchinson 1999a).
User fees at health facilities are intended to provide additional resources at
the local level for improving the quality and availability of health services and
providing a sense of community ownership. User fees are now charged for
most services at government health facilities, with exemptions for children, for
the poor, and for most preventive care. The effects of user fees on actual use
have been inadequately studied. Most studies have performed before and af-
ter comparisons, concluding that any decline in utilization represented a dete-
rioration in welfare (Asiimwe and others 1996; Hansen 1995; Mwesigye 1996).
Other studies, with insufficient sample sizes, have found no significant de-
crease in utilization, but overuse by staff and families. One report concluded
that the “most outstanding reason for the decline of the rate of utilization of
government health facilities is not the introduction of user charges but rather
the poor quality of services rendered by those facilities as compared to non-
governmental organization (NGO) facilities” (Jitta 1996, p. 42).
The low quality of government health services has been widely documented.
It is reported that while the physical structures exist for providing curative
services, the actual capacity at health units varies considerably. Often staff are
not present or critical supplies are only sporadically available (McPake and
others 1999; Olsen and others 1997). One of the most frequent complaints is the
lack of drug availability, which is believed to be associated with misappropria-
tion by health workers (Cockcroft 1996). McPake and others (1999) found that,
on average, 78 percent of drugs and supplies disappeared from the health units
in the mid-1990s. A pilot service delivery survey found that one of the “main
problems identified with the services were lack of drugs and poor access to
facilities. People resented having to pay for poor service without drugs
414 Paul Hutchinson
available” (Cockcroft 1996, p. 6). Other studies (Asiimwe and others 1996; Olsen
and others 1997) found that staff were present at health units only 30 percent
of the time. Although limited, recent survey evidence shows some improve-
ment in the staffing situation in the late 1990s (World Bank 1999a).
The poor accountability for inputs is reflected in the costs of providing ser-
vices. Basic services at government facilities have been found to be at least 1.5
times as costly to provide as similar services at NGO facilities (Republic of
Uganda 1997a). The principal accountability measure for improving quality
and efficiency of the health unit level—the establishment of health unit man-
agement committees (HUMCs) made up of community leaders—has not been
consistently successful. By establishing HUMCs at all health units, decentrali-
zation was intended to improve community oversight of health unit activities,
accountability of personnel, revenue collection, and ultimately the quality of
services offered. Instead, official user fee collections are low, probably
underreported, and generally have had little impact on service quality. The
HUMCs appear to benefit a few local elites, who use them for consolidation of
power, access to free health services, and appropriation of drugs and user fee
revenue via “sitting allowances” (payments for attending meetings). A study
of 12 government facilities in Bushenyi and Iganga districts in 1994–96 showed
that HUMCs had had little positive impact and found that little contact existed
between HUMCs and communities (Asiimwe and others 1996).
The evidence on user fee collection and HUMCs has not been uniformly
discouraging. In districts and health units in which training of health work-
ers and HUMCs has occurred, a greater proportion of user fee revenue ap-
pears to be allocated to improving quality. In Kabale district, for example, 43
percent of user fee revenue is allocated toward improving and providing
basic health services; only 13 percent is allocated toward staff salary allow-
ances. Overall, however, user fee revenue still constitutes less than 10 per-
cent of health units’ recurrent budgets (Republic of Uganda 1995/96a).
Another factor limiting the progress of decentralization is simply the lack
of qualified personnel for undertaking important health activities. Personnel
issues were cited in a survey of district directors of health services as the
most important impediments to implementation of activities, surpassing con-
cerns over funding. The survey also found that decentralization had led to
conflicts between health planners and local politicians regarding health sec-
tor priorities. However, the district directors noted that local ownership of
health plans and greater flexibility of planning—two of the major objectives
of decentralization—had significantly contributed to overall health sector
performance (Hutchinson 1999a).
Burden of Disease
As noted earlier, malaria and AIDS are believed to be the leading causes of
death. Burden of disease studies conducted nationally in 1995 and in 13 dis-
tricts in 1996 ranked major illnesses by discounted life years (DLYs) lost due
to mortality.1 The most common identifiable cause of lowered life expect-

ancy was malaria (table 13.3). AIDS ranked lower, though it was certainly
underestimated because estimates were based on hospital patient registers,
which often do not list AIDS as the cause of death. Common and generally
preventable childhood illnesses such as diarrheal diseases and measles con-
tributed significantly to mortality. Little information on causes of death is
available from earlier periods.
AIDS
AIDS in Uganda is both one of the worst cases and one of the best in the
developing world. The human toll has been staggering, estimated at nearly
2 million cumulative deaths since the start of the epidemic, almost 10 per-
cent of the country’s adult population in 1998 (UNAIDS and WHO 1999).
Table 13.3. DLYs Lost due to Mortality, Selected Causes of Death, 1995
and 1996
Disease National analysis, 1995 District analysis, 1996

Malaria 15.4 23.4
Other diseases 22.7 19.0
Diarrhea 8.4 12.7
Pneumonia/acute
respiratory illnesses 10.5 9.7
AIDS 9.1 9.6
Measles 4.2 5.7
Tuberculosis 4.1 5.1
Perinatal 18.4 4.8
Malnutrition 2.6 3.4
Maternal diseases 2.0 2.5
Trauma 0.7 1.6
Cardiovascular diseases 1.9 0.8
Dysentery n.a. 0.7
Tetanus n.a. 0.5
n.a. Not applicable. No values for these diseases were collected.
Source: Republic of Uganda (1996, 1998).
1. DLYs due to premature mortality for each illness are calculated by subtract-
ing the average age of death for individuals dying from a specific disease condition
from the average length of life of an individual using a Western life table. A dis-
count factor was used to value years of life far in the future differently from years in
the near future. Deaths from diseases that tend to occur at younger ages would
therefore tend to involve greater loss of DLYs than deaths from diseases that occur
later in the life cycle.
416 Paul Hutchinson
However, the response by the government, donors, and NGOs has signifi-
cantly affected the progression of the disease. Beginning early in the epi-
demic, necessary programs for epidemiological surveillance, control of
blood supply, education and counseling, and control of sexually transmit-
ted infections were established (World Bank 1999b).
The number of infected individuals is difficult to estimate. Most individu-
als are never tested and many never come in contact with the health system.
Estimates in 1999 put the number of living infected individuals at approxi-
mately 820,000 people out of a population of 20 million. In 1999 the adult preva-
lence rate was estimated at 8.3 percent, down from nearly 10 percent in 1997
(UNAIDS and WHO 2000). Exact number are difficult to calculate (Hunter
and Fall 1998). As a result of the epidemic, other diseases, such as tuberculosis,
have reemerged as serious health problems (Wabwire-Mangen and Maina 1999).
While a huge number of Uganda’s population is HIV positive, the rate of
new HIV infections is believed to be declining (Opio and others 1996). In
1985, 11 percent of prenatal clinic attendees in Kampala were HIV positive,
increasing to 31 percent in 1990. By 1996, HIV prevalence in a similar sample
of pregnant women had decreased to 15 percent (figure A13.2) (Republic of
Uganda 1992, 1994, 1997b; UNAIDS and WHO 1999). By contrast, sample
data from the Ugandan military show no such decrease, with rates climbing
from 16 percent in major urban areas in 1992 to 26.7 percent in 1995 (George
and others 1998; Mugerwa and others 1994; Mugyenyi and others 1995, 1996).
The large decrease for the sample of pregnant women is believed to be due to
massive efforts at educating the population about prevention of transmis-
sion, as well as the natural progression of the epidemic. Recent successes in
preventing transmission from infected mothers to their babies in controlled
trials may provide a low-cost means to further reduce transmission (Guay
and others 1999). Extrapolating trends in HIV prevalence to the population
at large, however, is difficult.
The economic impact of HIV/AIDS is considerable. In addition to the
psychological and emotional costs of losing a family member, households
must face the direct costs of treatment, the value of lost work time from ill-
ness or lower productivity while working, and the loss of income earners.
Spending on the treatment of HIV/AIDS-related illnesses, as well as signifi-
cant burial costs, means that households must supplement their resources or
reallocate funds from other priorities such as school fees for children, farm or
business inputs, or other medical expenses.
Unlike many other diseases, the impact of HIV/AIDS is much larger in the
income-earning age group. For most Ugandans engaged in agriculture, the
most common coping strategies include reallocating household labor, taking
children out of school, diversifying household agricultural production and in-
come activities, and decreasing the amount of land cultivated (Mutungadura,
Mukurazita, and Jackson 1999). Households may have to draw on personal
savings, sell assets, or borrow money. They may try to supplement their house-
hold earnings with alternative activities: selling firewood, brewed millet beer,
livestock, or handicrafts; building fences; tailoring; or other petty trade. In some

cases, overall food consumption may decrease (Barnett and others 1995;
Topouzis 1994). For households with meager incomes, HIV/AIDS represents
an additional burden that may propel these households further into disadvan-
taged economic circumstances.
Furthermore, women are 1.3 times more likely to be infected than men.
The loss of female household members, generally the principal caretakers of
children, has significant effects on the development of children in a house-
hold. Some children may be forced to withdraw from school to care for other
family members and to assist in work activities (Armstrong 1995). Many chil-
dren are sent to live with relatives, where they may be accorded fewer re-
sources than relatives’ own children (Barnett and others 1995).
The evidence indicates that HIV/AIDS has most significantly affected
the professional class of workers, at least at the outset of the epidemic, who
are based predominantly in urban areas. A national serosurvey in 1987/88 of
3,426 adults in three regions of Uganda found that the proportion infected
was highest among professional and other urban-based workers. From an
economic standpoint, the loss of these individuals represents a substantial
loss of human capital investment by firms and educational institutions. Busi-
nesses will face the additional costs of hiring and training new workers to
replace workers who have died prematurely (Armstrong 1995).
In the health sector, AIDS has significantly affected the allocation of pub-
lic health resources, taking resources that might otherwise have been used
to address other health problems. District annual work plans indicate that
average spending on HIV/AIDS, tuberculosis, and prevention and treat-
ment of sexually transmitted infections is approximately 5 to 10 percent of
the entire district health budget. This amounts to between US$0.50 to al-
most US$1 per person (Hutchinson 1999a). AIDS was the second leading
cause of inpatient mortality at the hospital level in 1990. Seventy percent of
medical ward patients tested HIV-positive; a higher percentage of infected
people could be found in tuberculosis wards. Uganda spent approximately
US$2 per capita to address the AIDS epidemic in 1996 (table A13.2).
Armstrong (1995) estimates that the resources used to treat only 35 percent
of AIDS patients could have been used to immunize one-third of infants or
treat 2.5 million cases of malaria. While the AIDS epidemic has probably
increased the total quantity of resources going to the health sector, it cer-
tainly has also shifted already inadequate resources away from the treat-
ment of other health problems.
Uganda has achieved tremendous success in the fight against AIDS, at
least relative to other countries in similar circumstances. The government’s
openness in addressing AIDS is the largest contributing factor, making ear-
lier interventions possible. This is reflected in many indicators of individual
behavior that can reduce the risk of contracting HIV: the average age for
first-time sex has increased, the percentage of teenagers having sex has de-
creased (Shuey and others 1999), and condom usage has increased (Republic
418 Paul Hutchinson
of Uganda 1995). Although more people are reportedly choosing only one
sexual partner, women are still limited in their ability to control their HIV
status by their inability to control male behavior (McGrath and others 1991).
A longitudinal community-based, closed, cohort study from 1987–94
found substantial behavioral changes. For example, the proportion of males
who had ever used condoms increased from 6.9 to 35.3 percent. At the same
time, the proportion of individuals with more than two sex partners in six
months decreased from 26.5 to 17.1 percent, and the prevalence of sexually
transmitted infections fell by nearly half (Konde-Lule, Tumwesigye, and
Lubanga 1997). However, consistent use of condoms is still low. In 1989,
hardly any women reported regular use of condoms; by 1995, only 1.5 per-
cent of women—but 15.4 percent of sexually active, unmarried women—
were regularly using condoms. Nearly a third of sexually active, unmar-
ried men regularly used condoms (Kaijuka and others 1989; Republic of
Uganda 1995).
Malaria
Despite the tremendous impact of HIV/AIDS, malaria is the most significant
cause of mortality and morbidity. The situation has been aggravated by the
low level of malaria control infrastructure, the result of both local politics
and global trends in malaria control. The political problems of the 1970s dis-
rupted and dismantled much of the public health infrastructure in Uganda,
while international malaria efforts reflected growing disillusionment regard-
ing the general belief of the time that the costs of malaria control were too
great given the level of benefits attainable (Hutchinson 1999c).
The current situation stems from years of absence of coordinated malaria
control efforts by the government and donors. The levels of mortality and
morbidity are aggravated by a variety of factors, including poor diagnostic
capacity, inadequate case management, delayed or improper treatment by
households, and scarce public funding for malaria control. Knowledge of the
causes of malaria, its symptoms, and proper treatment is low among the popu-
lation. According to the few studies that have been conducted, resistance to
chloroquine and other drugs is fairly low, and although some evidence sug-
gests that resistance is increasing, the reported high percentage of treatment
failure is probably due to improper dosing or poor-quality drugs. Aggravat-
ing the situation, Ugandans rarely use protective measures such as mosquito
nets (Kilian 1995; Langi and others 1994).
In economic terms, malaria is costly to households not just because of
treatment expenses, but also because it lowers work productivity and con-
tributes to loss of labor time for those who are sick and their caretakers. The
impact differs from that of AIDS because of the age distribution of the dis-
ease; malaria predominantly afflicts children. Few studies in Uganda have
examined the economic impact of malaria on specific income groups. Baseline
data—for example, on public attitudes toward the disease, vector densities,
and drug resistance—are scarce. Only a handful of districts have benefited

from extensive research (Hutchinson 1999c).
Many of the activities for an effective malaria control program fall under
the category of public goods, implying that government involvement is likely
to be the only means by which control activities will be undertaken. Vector
control benefits, through localized spraying and other means, are not easily
excluded from those individuals unwilling to pay for them. Such free riding
behavior makes private provision unlikely. Also, the government has a strong
role to play in disease surveillance and research, particularly on monitoring
the efficacy of frontline drugs for dealing with malaria. Resistance to chloro-
quine and other drugs is inevitable and the government must implement a
program to advise on when and how to switch standard treatment guidelines.
Maternal and Child Health

The situation regarding maternal health in Uganda has changed only slightly
since the 1960s. Fertility in Uganda remains high: approximately 6.9 births
per woman, almost identical to 1969 levels. A small decrease from a high of
7.4 births per woman has been noted in the past 10 years due to increased
use of contraceptives, lower fertility preferences, and a variety of other fac-
tors. HIV/AIDS has likely contributed to reduced total fertility because it
encourages fewer sexual contacts, promotes increased use of barrier protec-
tion mechanisms, and leads to shorter life spans.
Maternal mortality also remains high relative to industrial countries, es-
timated at more than 500 deaths per 100,000 live births. Some of the reasons
for the high maternal mortality include poor maternal nutrition, short birth
intervals, early age at first birth, and lack of trained assistance at birth. Most
women, almost 64 percent, deliver infants at home, generally without trained
assistance. However, nearly all women visit a health facility at least once for
prenatal care (Republic of Uganda 1995). One study found that women at-
tend prenatal care clinics for several reasons: to receive a tetanus toxoid in-
jection, to check on the health of the baby, and to receive a prenatal care card.
Women believe that prenatal care cards increase the ease of admittance to
facilities for delivery and lessen the likelihood of abuse by health workers
(Amooti-Kaguna and Nuwaha 2000).
Some improvement has been noted in recent years, particularly in the pro-
portion of births assisted by traditional birth attendants. The proportion of
births with trained staff, however, has not improved (Kaijuka and others 1989;
Republic of Uganda 1995). The government has exerted considerable effort in
improving the training and supervision of traditional birth attendants, who
are now provided with delivery kits and supervised by the district director of
health services (Amooti-Kaguna and Nuwaha 2000). The principal alternative,
increasing the proportion of births in modern health facilities, is likely to be
relatively costly, requiring significant upgrading of health facilities. At present,
this solution may not be a high priority for public sector funds because of the
420 Paul Hutchinson
relative rarity of maternal deaths, the myriad of other health problems facing
the country, and the potential to improve maternal health through other means.
Other indicators of reproductive health have shown some improvement,
benefiting from greater availability of services and considerable health edu-
cation. One-third of women and more than half of men had heard a family
planning message in the six months before the DHS in 1995. Use of contra-
ceptives increased from 5 to 15 percent from 1988 to 1995, up from nearly
nonexistent levels in the 1970s. Most women receive at least one tetanus tox-
oid injection during their pregnancies.
With the exception of nutritional status, children’s health has been im-
proving over time. In addition to the infant mortality decrease, under-five
mortality has decreased from 180 to 147 per 1,000 births from 1988 to 1995.
More than 90 percent of children are breastfed (Republic of Uganda 1995).
The reasons for the improvements in children’s health are likely due to im-
provements in vaccination coverage, at least until recently, and improvements
in household welfare from growth in the economy. However, tracing the di-
rect causes through the available data would be a huge task.
Despite the improvements, a high and increasing level of illness exists
among children. In 1996/97, nearly half of children under age one and one-
third of children aged two to five were reported to be ill in the 30 days prior
to the survey (table A13.3). This is up from 35 and 21 percent, respectively,
for these age groups in 1992/93. HIV/AIDS has probably contributed to this
rise, as well as changes in perceptions of illness. The 1996/97 household sur-
vey found that 17 percent of children had experienced diarrhea in the pre-
ceding two weeks.2 Of these, 27 percent were given no treatment.
Furthermore, several recent trends exist that are disturbing and threaten to
jeopardize the gains made in children’s health. In particular, recent data indi-
cate a significant decline in routine immunization coverage (figure 13.1). The
principal cause is believed to be the dissolution of the vertical program for im-
munizations and the subsequent lack of funding for vaccination outreaches.
Until 1997, vaccinators were paid primarily by the United Nations Children’s
Fund. However, this practice stopped in 1997, and many districts did not allo-
cate funds from other sources to pay vaccinators (Bukenya 1998). The corre-
sponding declines in routine coverage, aside from immunizations from national
immunization days, are dramatic. After following rising trends until 1996,
measles vaccination coverage dropped from 82 to 49 percent through 1999; DPT
(diphtheria-tetanus-pertussis) vaccinations decreased from 74 to 46 percent; BCG
(tuberculosis) vaccinations decreased from 96 to 69 percent, and tetanus toxoid
vaccinations for pregnant women decreased from 72 to 38 percent.
2. The government intended to carry out the fourth monitoring survey (MS-4)
in 1996/97, but its implementation was postponed until 1997/98. As most publica-
tions by the Bureau of Statistics in this survey refer to 1996/97, this chapter uses the
period 1996/97 when referring to MS-4.
Figure 13.1. Immunization Coverage of Children Aged 12–24 Months,

1994/95–1998/99
110
Percentage of target population
100
90
80
70
60
50
40
1994/95 1995/96 1996/97 1997/98 1998/99
Measles DPT3
Polio BCG
Source: UNEPI (1999).
Nutrition
Nutritional outcomes for children are perhaps not improving as rapidly as
would be expected when Uganda’s decade-long economic progress is consid-
ered. The 1998 Human Development Report by the United Nations Development
Programme found that the percentage of underweight children under age five
was the same in 1975—28 percent—as it was in the early 1990s. Since 1988/89,
a slight decrease in chronic undernutrition resulting in low height-for-age was
found, from 43 percent to 39 percent. Other indicators worsened. Acute under-
nutrition increased slightly, from 1.9 to 5.1 percent, and low weight-for-age
increased from 23 to 25 percent (Republic of Uganda 1995). These findings are
surprising because nutritional inputs are more likely to be a function of house-
hold income than available medical inputs.
Several reasons account for the apparent lack of improvement in nutri-
tional outcomes: suboptimal breastfeeding and infant weaning practices; high
incidence of infectious diseases, which reduce food absorption; low levels of
maternal education; and poverty (World Bank 1997a). As noted earlier, re-
porting of illness has increased in all age groups—nearly 50 percent of chil-
dren under age one were reported to have been ill in the 30 days preceding
the 1997 survey, but only 35 percent of children were declared ill during the
same interval in 1992. The increasing incidence of illness may contribute to
worsening nutritional indicators for children.
422 Paul Hutchinson
By most indicators, breastfeeding practices have continued to improve,

but alone may provide an incomplete picture of changes in child nutrition.
Breastfeeding, which benefits both mother and child, is an almost univer-
sal practice for all income groups, those at all levels of maternal education,
urban and rural residents, and both sexes of children. The proportion of
children up to age three who are breastfed was higher in 1995 than in 1988/
89. The median duration that a child is breastfed was approximately 20
months in 1995, one month longer than in 1988/89. Infant formula and
bottles are used infrequently, and supplementation of breast milk with other
food occurs relatively late (Republic of Uganda 1995).
The government has articulated a plan for addressing problems of poor
child nutrition and development through the 1993 Uganda Programme of
Action for Children and codified by a Child Bill of Rights. Several develop-
ment projects contain nutrition components, including district-level activi-
ties on iodine deficiency control, provision of vitamin A, parental awareness
of child development, and community mobilization.
Orphanhood
In recent years, AIDS has significantly contributed to the number of orphans
in the country. According to the 1969 national census, 3.6 percent of children
under 20 had lost their mothers, and 6.6 percent had lost their fathers (no
data were collected on how many lost both parents). By 1991, the national
census showed that orphanhood had risen substantially: 4.1 percent had lost
their mothers and 10 percent had lost their fathers (UNAIDS and WHO 1999).
The 1995 DHS indicated that 5.3 percent of children had lost their mothers,
10.4 percent had lost their fathers, and 13.5 percent had lost at least one par-
ent (Gregson, Zaba, and Garnett 1999).
Considerable variance is apparent in estimates of the absolute number of
orphans. Differences are due primarily to different assumptions about popu-
lation growth and fertility, HIV/AIDS prevalence and incidence rates, the
probability of vertical transmission, and behavioral responses to the epidemic.
By the mid-1980s, the number of orphans in the country was believed to be
almost 1 million, due largely to the years of civil war. In 1991 the national
census indicated that there were probably just over 1 million orphans under
the age of 18, 11.6 percent of the under-18 population. By 1998 the total num-
ber of orphans in the country had risen to approximately 1.5 million. Others
estimate that the total number of orphans was even higher: approximately
2.2 million in 1995 (Hunter and Fall 1998).
The estimated impact of AIDS on orphanhood also varies considerably.
UNAIDS and WHO (1999) estimate that the number of children who had
lost their mothers or both parents due to AIDS was 1.1 million at the end of
1997. Other sources estimate considerably lower numbers of AIDS orphans,
around 670,000 in 2000 (Goliber 1999). Some researchers estimate that the
number of AIDS orphans will peak in 2001 (Goliber 1999); others predict a
peak around 2010 (Hunter and Fall 1998).
Demand for Curative and Preventive Services

The many changes in the health sector during the past decade have im-
pacted the availability of health services and individuals’ use of preventive
and curative care. This section uses data from multiple waves of national
household and community surveys from 1992/93 through 1996/97 to evalu-
ate the relative effects of the demand-side and supply-side factors (see ap-
pendix A at the end of the book).
Without a doubt, the health system is still struggling to meet the basic
health needs of the Ugandan population. Some evidence indicates that re-
porting of illness has been increasing over time, particularly among the poor.3
Data from national household surveys indicate that the proportion of indi-
viduals in the lowest income quartile reporting illness in the past 30 days
nearly doubled from 1992/93 to 1996/97 as suggested earlier, from 19 to 36
percent (figure 13.2). In contrast, the proportion of individuals in the highest
Figure 13.2. Percentage of Income Quartile Reporting Illness in the Past

30 Days, 1992/93 and 1997/98
Percentage of income quartile reporting illness
40
30
20
10
0
1992/93 1993/94 1995/95 1996/97
Lowest quartile Second highest quartile
Highest quartile Second lowest quartile
Source: Republic of Uganda (1992/93, 1993/94, 1995/96b, 1996/97).
3. In most surveys from developing countries, wealthier individuals are more

likely to report illness than the poor. This is linked to different perceptions of illness:
as incomes increase, individuals revise what they consider to be an acceptable level
of health and develop a greater awareness of health conditions that can be treated
(Akin, Guilkey, and Denton 1995; Akin and others 1998).
424 Paul Hutchinson
income quartile reporting illness increased from 22 to 26 percent. The rea-

sons for the increase in reporting are not immediately clear, particularly with
regard to the AIDS epidemic.
The demand for health services is a function of many factors: ill health
and perceived need, the time and monetary costs of seeking care, the quality
of available services, and the availability of alternatives. As mentioned, the
extensive rebuilding and reconstruction of health facilities in recent years
have significantly increased physical access to health services. However, varia-
tions in quality mean that government services are often underused, even by
the poor for whom the services may be free.
Health services are available from several providers: the government,
NGOs, and private providers. The distinction between the government and
private sectors is often blurred. Many private practitioners are also public
sector employees, providing services within government clinics or using
government resources in private clinics. Traditional healers also play a role
in providing care, but their contributions are often underreported in formal
surveys (McPake and others 1999).
The government, private, and NGO sectors provide roughly equal por-
tions of health care. The government is the most significant provider of
immunizations, modern delivery, and reproductive health care, but pro-
vides only a small portion of curative care. More than 60 percent of immu-
nizations occur in government health units, and another 17 percent occur
in government outreaches (Hutchinson 1999b). The government provides
for nearly half of the minority of women who use modern contraception,
slightly more than private medical sources (Republic of Uganda 1995). The
1996 pilot service delivery survey found that the government provided 43
percent of all health services, the private sector provided 35 percent, and
traditional doctors and healers provided 9 percent (Cockcroft 1996). This
study refers to health service contacts for any type of care, including cura-
tive, immunizations, and family planning.
However, for curative care government health units treat only 20 to 25
percent of ill individuals. Data from five different household surveys from
1989 through 1997 indicate that individuals who report illness are more likely
to use private and NGO health care providers and even more likely to choose
self-medication over government health care services (table 13.4). The differ-
ences are even greater in urban areas where more treatment options gener-
ally exist. The Ministry of Health cites several reasons why people are less
likely to chose government facilities than private and NGO providers: the
government facilities have lesser availability of drugs, equipment, and mate-
rials; lack of incentives for staff to provide adequate treatment and diagnoses;
less convenient opening hours; greater staff absenteeism and lack of staff on
post, even though government staff are generally better paid than NGO staff;
and inappropriate staff attitudes (Republic of Uganda 1998).
Evidence from Uganda indicates that the poor are less likely to use all
health services than the nonpoor, even when such services are free (figure
Table 13.4. Use of Curative Services, 1989, 1992/93–1996/97

(percent)
Type of care 1989 FHHBS 1992/93 1993/94 1995/96 1996/97

Self-medication 35.5 46.9 41.0 38.7 44.8
Government 21.8 18.5 18.6 24.3 20.9
Private/NGO 29.1 32.5 38.0 35.5 31.5
Traditional 13.3 2.0 2.4 1.2 2.9
Total 99.7 100.0 100.0 100.0 100.0
Note: Totals may have have been rounded to 100 percent.
Source: Family household health and budget survey (FHHBS) data from Barton and Bagenda
(1993, p. 76); national household surveys.
A13.3). Compared with the nonpoor, children in low-income households

are less likely to be fully immunized, women are less likely to use pre- and
postnatal care, and household members of all ages are less likely to use
modern curative care. The reasons are examined more fully in the econo-
metric estimations.
In general, the health needs of the poor are likely to be greater than the
health needs of the nonpoor. They are more likely to face adverse circum-
stances—poor sanitation, lack of clean water, poor working and living envi-
ronments—thereby increasing the likelihood of ill health relative to the
nonpoor. At the same time, the poor are less likely to have the resources to
address their greater health needs. Uganda’s poor spend roughly a quarter
to a half less than the nonpoor on health services (table A13.4). On the one
hand, this may be an indication of a well-functioning system of exemptions
and waivers that allows the poor to use services they might otherwise not be
able to afford. On the other hand, it may indicate that the poor do not have
the resources needed to acquire sufficient health services to meet their needs.
Utilization patterns show that health service quality is an important fac-
tor for both the poor and nonpoor. Both groups are more likely to use private
and NGO providers, where quality is generally higher, than government pro-
viders for curative care. For the poor, the gap has been shrinking in recent
years. However, the proportion of the poor who chose not to seek formal
treatment or to self-treat doubled from 1992/93 to 1996/97, from 7 to 15 per-
cent, reaching a high of 25 percent in 1995/96.
Accessibility is also an important determinant of service use. Individuals
who live farther from health units are less likely to seek care because of the
time costs involved. However, the effects of proximity can be easily overstated.
For instance, 65 percent of ill individuals in 1993/94 and 64 percent in 1995/96
used a modern health care provider if they lived within one kilometer of a
health unit. However, a significant proportion of those living at a considerable
distance (10 to 15 kilometers) also used a health unit when ill: 46 percent in
1993/94 and 56 percent in 1995/96. In general, for every additional kilometer
426 Paul Hutchinson
in distance, the likelihood of use dropped by just under 1 percent. More im-
portant, roughly one-third of ill individuals do not use services even though
they live within one kilometer of a functioning health unit. For these individu-
als, other factors must be at work.
Econometric Analysis
Because multiple factors determine the use of health services, it is vital for
policymakers to have an assessment of the relative importance of each factor.
For instance, how important is it for individuals to be close to a facility if drugs
are not available or staff are seldom present? If user fees are charged to im-
prove the quality of available services, will they significantly reduce utiliza-
tion by some groups more than others? How important is household income
in determining whether an ill household member is taken for curative care?
To examine simultaneously the importance of multiple factors on the de-
mand for a variety of health goods and services, econometric estimations of the
demand for curative care, prenatal care, and immunization coverage were per-
formed. Data were pooled from the 1993/94, 1995/96, and 1996/97 national
household and community surveys (see appendix A at the end of the book).
Individuals were linked with the specific health facilities serving the areas where
they live to determine which factors most affect the likelihood of use.4
The dependent variables include (a) reporting of illness and use of any
modern curative care, 5 (b) completion of DPT vaccinations, and (c) prena-
tal care with trained health staff. Full DPT vaccination was used as the
4. Although community surveys were conducted in 1992/93, coding errors made

the ability to link community variables with specific households impossible. In 1994/
95, the household survey did not contain questions on health behaviors, and there-
fore no estimations were made based on health facility characteristics.
5. The dependent variable for use of curative care is a dichotomous variable for
whether an ill individual used a modern health care provider, defined as a govern-
ment or private/NGO provider. Use of a modern health care provider was defined
relative to the alternatives: no treatment or self-treatment, pharmacy, or traditional
healer. Combining the government and private/NGO providers into a single cat-
egory was necessary because most of the sample had access to only one type of facil-
ity. A dummy variable for whether the available facility is government owned was
included in the estimations to test whether characteristics of these facilities, other
than those explicitly included in the model, affected the likelihood that individuals
will use modern curative care. In 1992/93, 1993/94, and 1996/97 individuals were
allowed to record only one type of curative treatment. In 1995/96, individuals were
allowed to report two, including the most recent. A composite variable on choice of
care for 1995/96 was used for comparison with the earlier years. Choice of care was
considered to be the first action taken by an individual, unless “no care” or “self-
treatment” was indicated. In those cases, the second choice of care, as long as it was
not also “no care” or “self-treatment,” was considered the first choice of care.
measure of immunization behavior because it requires multiple visits to

health care providers at 6, 10, and 14 weeks of age, and therefore reflects a
greater commitment to the child’s health by parents or guardians. Ques-
tions on prenatal care and vaccination coverage for infants were not asked
in the 1993/94 survey. The pooled sample sizes were 14,569 for children
aged 0–5 years (of which 5,110 were reported to be ill in the 30 days preced-
ing the survey), 3,265 for children aged 0–1 years, and 2,247 for pregnant
women aged 12–45.
Individual-level exogenous variables include income, gender, residence
in a rural area, and level of education. For children, mother’s age and
education are included. In all estimations, individuals are linked with the
principal facility serving the community.6
Facility characteristics include staffing variables (presence of doctors,
number of nurses and support staff), availability of drugs and supplies (func-
tioning cold chain, malaria drugs, antibiotics, oral rehydration salts, ban-
dages, sterilization equipment, syringes), hours open per week, physical
appearance of the facility, prices (basic consultation, malaria drugs, antibi-
otics), and distance from the community. In the final estimations, only a
subset of facility characteristics was included to avoid problems of
multicollinearity.
For all estimations of health care demand, simple probits are used in which
the dependent variables are the probability that an individual will use the
specific health service (curative, immunization, and prenatal care) at a mod-
ern health care provider relative to not using the service. The same method is
used to estimate the determinants of reporting illness. Huber-White stan-
dard errors are used in all estimations to control for enumeration-area clus-
ter effects.
Illness and Demand for Curative Care (Children Aged Birth to Five Years)
The estimations of the factors associated with reporting illness and use of
curative care reveal much about the relationships between income, access,
and facility characteristics on the demand for care (table A13.5).
6. To create the dependent variables based on the characteristics of health facili-

ties (that is, use of modern curative services, prenatal care, and so forth) each enu-
meration area, or area in which the survey was conducted, in the household survey
was linked with the modern health facilities listed in the community survey. One
community survey was completed for each survey enumeration area. For each enu-
meration area, up to two facilities could be listed by community leaders. For this
analysis and following procedures used elsewhere (Akin, Guilkey, and Denton 1995;
Akin and others 1998), the facility that was closest in distance was considered the
principal facility serving the community. In cases in which facilities were equidistant
from the community, a facility was selected at random.
428 Paul Hutchinson
INCOME. Children in the lowest income quartile are considerably less

likely to receive modern curative care when ill than children in all other
income quartiles, even when controlling for other factors such as mother’s
education and physical distance to facilities. This result may indicate that
exemption mechanisms are not functioning properly, preventing children
in the most vulnerable households from receiving care. It may also be linked
to the quality of treatment that the poor receive at facilities—often longer
waiting times and less courteous service—relative to the nonpoor. Chil-
dren in poor households are somewhat more likely to be reported as ill.
The latter result is also reflected in the hygiene variables—type of toilet
and main source of water—that tend to be associated with income. Chil-
dren in households without a flush toilet or pit latrine are more likely to be
reported as ill than are children in households where the main source of
water is a borehole.
MOTHER’S CHARACTERISTICS. Children whose mothers are older are less likely
to be reported ill and less likely to be taken for curative care. This is most
likely a reflection of maternal experience. Older mothers may be more aware
of health practices that prevent illness and are also more likely to know when
care is necessary. Mother’s education is positively associated with both re-
porting of illness and use of modern curative care.
FACILITY CHARACTERISTICS. Price, distance, and government ownership all

decrease the likelihood that the nearest modern facility will be used for cura-
tive care when ill. Greater availability of childhood vaccines, an indicator of
facility quality, increases the likelihood that a facility will be used. Other fa-
cility characteristics are not statistically significant, but may be correlated
with the variable on government ownership. The result for government own-
ership supports the data presented earlier that individuals prefer private and
NGO health care providers over government providers.
YEAR. As shown earlier, reporting of illness appears to be increasing over

time, while use of curative care when ill appears to be decreasing. Relative to
1993/94, the 1995/96 and 1996/97 surveys show that children are more likely
to be reported as ill but less likely to receive modern curative care. The rea-
sons for these trends need to be examined more closely.
SIMULATED IMPACTS OF POLICY VARIABLES. Using the coefficients from the esti-
mation of the demand for curative care, it is possible to simulate the impacts
of changes in important facility characteristics such as price, distance, and
availability of supplies, or individual characteristics such as a mother’s edu-
cation or age, on the probability that an ill individual will use a modern health
care provider. For example, independent variables are moved by one stan-
dard deviation from their mean to simulate equivalent-sized changes.
The simulations indicate the importance of quality characteristics, in-

come, and price but reveal the lesser importance of distance (table A13.6).
For example, if all health facilities had vaccines for basic childhood illnesses,
utilization would increase by 3.7 percent, the largest impact of any of the
simulations. A one standard deviation increase in price has a 50 percent
greater effect on utilization than a one standard deviation increase in dis-
tance from the facility; that is, a 2.8 percent decrease in the probability of
usage occurs if price is increased from U Sh 266 on average to U Sh 623. In
contrast, a 1.9 percent decrease in usage occurs if the mean distance is in-
creased by one standard deviation.
Household factors also have significant impacts on utilization. If all moth-
ers completed primary school, utilization would be predicted to increase by
1.6 percent. If every child were in a household in the highest-income quartile,
utilization would increase by 4.1 percent, approximately the same effect as
ensuring universal vaccine availability.
The Demand for Prenatal Care and Childhood Immunizations

To further examine the various factors affecting the demand for health ser-
vices, probit estimations of the demand for two preventive services are pro-
vided: DPT immunizations for children aged birth to age five and use of
prenatal care (table A13.7). The main difference between preventive services
and curative care is that the former are generally free at government facili-
ties. As a result, price and income should not be as important in the preven-
tive estimations as in the estimations regarding curative care.
The results largely confirm those reflecting the demand for curative care
estimations. Income is an important determinant of both DPT coverage and
use of prenatal care, but not at the same levels of statistical significance as
for curative care treatment. Notably, pregnant women are more likely to
use prenatal care if the price of a basic consultation is higher; because these
services are generally free, price may be a reflection of higher quality. Again,
government ownership is negatively associated with use, though only for
prenatal care and at a lower level of statistical significance than in the pre-
vious estimations. Distance is important only for DPT coverage. Quality
indicators—presence of at least one doctor and a functioning cold chain—
are associated with higher likelihood of use. More educated mothers are
more likely to have their children vaccinated and to use prenatal care.
Orphanhood and the Demand for Health Services

Orphanhood can have an impact on child welfare in a variety of ways. First,
orphans likely will have lost either a significant income earner or a significant
caregiver. Losing an income earner means that there are likely to be fewer re-
sources for household priorities, including school fees and medical care.
430 Paul Hutchinson
For curative care, differences in the likelihood of receiving treatment from

a modern health care provider are dramatic (table A13.8). Ill children with two
parents are almost twice as likely to receive curative care than ill children with
neither parent alive. For other welfare indicators—immunization coverage and
school enrollment—the differences are less apparent until econometric estima-
tions are performed to simultaneously control for a variety of factors.
The importance of parents is supported by probit estimations of the de-
terminants of curative care use, full immunization coverage, and current
school enrollment (table A13.9). Data show that several household status
factors are important elements of social service use. All other things being
equal, children who have lost their mothers are significantly less likely to
be fully immunized or to receive curative care when ill, and children who
have lost both parents are significantly less likely to be enrolled in school.
Again, the level of education of the adult females in the household—whether
the child’s mother or guardian—significantly influences child well-being.
Because orphanhood is projected to increase (Hunter and Fall 1998), sub-
stantial differences in well-being between orphaned and nonorphaned chil-
dren provide considerable cause for concern.
Conclusions and the Way Forward

Uganda has made great strides in addressing its many health problems over
the past 10 years, but the continuing presence, and in some cases worsening,
of these problems is a reflection of the long road that the country has had to
travel. To be overly critical of the current situation is to fail to recognize the
enormity of the task that the country has faced.
The main issues in the health sector currently center on poor technical
efficiency at government facilities, lack of technical capacity at the district
level, and incentives in the current decentralized system toward declining
availability of primary health care services. The evidence to date from a vari-
ety of sources in Uganda lends itself to making some important conclusions
and recommendations for improving health sector reform.
First, the government should remain committed to providing or financ-
ing services that are public goods in nature—health education, clean water,
adequate sanitation, infectious disease control, and so forth—that are un-
likely to be provided privately. This is both equity enhancing and cost-
efficient, by shifting resources from high-level curative services that favor
urban areas and relatively wealthier individuals, to rural and relatively
poorer households. This commitment is already demonstrated by the focus
under the decentralized system of providing an essential package of health
services, of which the principal components are public health activities.
This package addresses much of the disease burden of the country, which
results from preventable diseases and conditions. The government’s suc-
cess in this area is evident from the high rates of immunizations, at least
until recently. One public health problem that has received scant attention
in the past two decades has been malaria.
Second, the government should continue to expand the available resources

for health activities through the development of alternative financing mecha-
nisms such as user fees, insurance, and prepayment schemes. Even with ad-
ditional resources from debt relief, the financial burden on the government
will remain large. Most government health facilities charge user fees, with
exemptions in place for the poor. In NGO facilities, which are often located
in remote rural areas, user fees cover one-third to one-half of recurrent costs.
In government facilities, they cover 5 percent or less (Okello and others 1998).
Insurance and prepayment schemes can protect households from the finan-
cial risks of catastrophic illness. Insurance will also reduce the burden on the
government of subsidizing expensive curative care. This burden is likely to
increase as Uganda experiences the demographic transition from a popula-
tion in which the principal causes of death are from preventable diseases to a
population increasingly faced with diseases of aging. Virtually no develop-
ing country can support highly subsidized tertiary curative care without
developing insurance systems (World Bank 1987). Furthermore, insurance
allows prices to be set commensurate with actual costs. This will increase
transparency and ensure that resources are allocated more efficiently. The
development of insurance coverage for government and formal sector em-
ployees, where administrative costs are likely to be lower at first, could go a
long way toward providing additional resources for the government and a
basis for extending such coverage to the wider population.
Third, it is important to recognize that the government is already not the
principal provider of curative care. That NGOs can provide higher-quality
services at lower cost is indicative of serious problems of accountability and
poor incentive structures at government facilities. This result is borne out by
the econometric estimations presented in this chapter; quality indicators ap-
pear to be at least as important as distance and price in determining whether
individuals will use available health services. The inability of the govern-
ment to provide high-quality services and to ensure functioning safety nets
for the poorest results in many vulnerable groups receiving inadequate care.
Econometric estimations also show that the poor are considerably less likely
to use all forms of preventive and curative care, even when factors such as
education and access are controlled for.
Other mechanisms to improve quality and accountability could also be tried.
The poor might be better served if the government subsidized their care at
private and NGO facilities. Alternatively, innovative public and private mixes
of curative care delivery, ones in which health units have incentives to provide
quality care to generate revenue and in which incentives exist for efficient use
of resources, could be a focus of government efforts. Greater piloting of au-
tonomy mechanisms and contracted services could be tried. Many of these
activities are already under way, particularly innovative public collaboration
with NGOs and private facilities (Republic of Uganda 2000).
Fourth, decentralization is unlikely to be a panacea that will cure all the
ills of the health sector. In practice, decentralization of production or deliv-
ery of certain public goods may lead to efficiency losses if it results in an
432 Paul Hutchinson
undersupply of public goods or ignores economies of scale, with subsequent

higher unit costs. There is some evidence that the former is occurring. Move-
ments toward decentralization should be selective in the functions and re-
sponsibilities affected; resource allocation decisions for publicly-provided
private goods may be suited for decentralization to the lowest (health unit)
levels, while decisions regarding highly public goods, particularly those ben-
efiting the entire country, may be better suited to higher levels.
Fifth, the capacity of health personnel for carrying out health activities ap-
pears to be one of the fundamental impediments to implementation of activi-
ties at the district level. Considerable training has been ongoing, but this pro-
cess will require a longer period to complete. Such investments in human capital
require distinguishing between the short run and the long run; greater respon-
sibility at the local level will build capacity and greater availability of services
in the long run, but may lead to lesser availability in the short run. Such a
reduction appears to have occurred with childhood immunizations.
Recently the government started looking into the possibility of using a
sectorwide approach for health, including systematic consultation with do-
nor agencies. The government sees the sectorwide approach as a promising
means of addressing some important problems, such as the need to increase
coordination of donor-funded activities. At present, the donors have largely
divided the country up and work only in their selected districts. This has
resulted in unevenness in district coverage.
Several important elements must be addressed in the context of a
sectorwide approach. Performance monitoring must be an essential element
(Cassels 1997), but it has not been well developed to date. Financial and man-
agement audits should occur more regularly, and the information systems
needed to monitor changes in health status and the delivery of health ser-
vices (for example, inpatient and outpatient visits) are still being developed.
The health management information system collects data on morbidity, fam-
ily planning, and immunizations at government facilities. This system is not
yet fully in place in all districts. Reporting has been voluntary, and participa-
tion has been low. Moreover, even when the system becomes fully opera-
tional, it will not cover outcomes at NGO and private treatment facilities,
which account for the majority of health outcomes.
The national malaria control program must be rebuilt in the context of
Uganda’s decentralized system of health services. In the current setup, plan-
ners determine health priorities and how to allocate resources in their local
districts, while the central Ministry of Health is supposed to provide techni-
cal assistance, set standards, and develop policy. In rebuilding the national
program, health officials will have to strengthen the central malaria control
unit’s ability to offer technical assistance to districts, conduct policy research,
and access international information on progress in malaria control. There is
already evidence of renewed efforts against malaria at both the central and
district levels, but greater coordination, more resources, and technical assis-
tance are sorely needed (Hutchinson 1999c).
The direction of the AIDS epidemic is still a matter of considerable debate.

While behavioral change has been noted, the impact of the epidemic will cer-
tainly be felt for at least the next 10 to 20 years. One area that has recently be-
come a point of contention in the health sector is access to the HIV/AIDS
antiretroviral treatments widely available in industrial countries. With the pos-
sible exception of programs to prevent transmission from infected mothers to
unborn children (Marseille and others 1999), the case for public sector financ-
ing of the initiative is not strong. The costs per person for the drugs relative to
the benefits far exceed the cost-benefit ratio for treatment of other preventable
illnesses and conditions. While highly unfortunate, allocation of extremely scarce
public sector resources to infected individuals for treatment of a condition that
may not be ameliorated may represent a low priority. Public sector involve-
ment should focus mainly on preventing transmission from infected individu-
als to uninfected individuals, particularly through cost-effective interventions
such as health education to limit sexual contact or use of barrier protection
mechanisms. Tough decisions are certainly required by public sector planners.
Annex 13.1. Data and Estimation Results
Figure A13.1. Life Expectancy at Birth for Selected East African

Countries, 1960–95
65
60
Life expectancy (years)
55
50
45
40
35
1960 1975 1980 1985 1990 1995
Uganda Tanzania
Ethiopia Kenya
Source: World Bank (1979, 1986, 1992, 1997b).

434 Paul Hutchinson
Figure A13.2. HIV Prevalence in Women Attending Prenatal Clinics,

1985–97
35
30
25
HIV prevalence
20
15
10
0
1985 1987 1989 1991 1993 1995 1997
Major urban areas
Outside major urban areas
Source: UNAIDS and WHO (1999).

Figure A13.3. Percentage of Lowest- and Highest-Income Quartiles

Using Curative and Preventive Care, 1995/96
Modern curative
Fully immunized
BCG
DPT3
Measles
Polio3
Prenatal care
Postnatal care
Tetanus toxoid
0 20 40 60 80 100
Percent
Highest Lowest
Note: Immunization data are for children aged 12–18 months. Tetanus toxiod vaccination refers
to whether a woman reports receiving one or more tetanus toxiod vaccinations during the most
recent pregnancy.
Source: National household survey 1995/96.
Table A13.1. Numbers of Health Units, 1986 and 1996
1986 1996
Type Government NGO Total Government NGO Private Total
Hospitals
Number 46.0 33.0 79.0 55.0 39.0 4.0 98.0
Percent 5.8 24.4 8.5 5.1 10.2 10.8 6.5
Health centers
Number 102.0 5.0 107.0 158.0 61.0 4.0 223.0
436
Percent 12.9 3.7 11.6 14.6 15.9 10.8 14.8
Dispensary and below
Number 643.0 97.0 740.0 872.0 283.0 29.0 1,184.0
Percent 81.3 71.9 79.9 80.4 73.9 78.4 78.7
Total
Number 791.0 135.0 926.0 1,085.0 383.0 37.0 1,505.0
Percent 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Note: Government health units outnumber NGO health units by approximately two and a half. Half of government health units are subdispensaries,
compared with only 30 percent of NGO facilities.
Source: Republic of Uganda (1987, p. A53; 1997c).
Table A13.2. HIV/AIDS Funding, 1996

(US$)
Funds per Funds per HIV

Source Funding capitaa positive individual b
International donors 35,043,490 1.69 37.68
National government 2,540,000 0.12 2.73
Total 37,583,490 1.81 40.41
a. Based on a 1996 population of 20,791,000.
b. Based on an estimate of the number of people living with HIV/AIDS of 930,000.
Source: UNAIDS and WHO (1999).
Table A13.3. Reporting of Illness among Children, 30 Days Prior to

Survey, 1992/93–1996/97
(percent)
Age group 1992/93 1993/94 1995/96 1996/97

0–1 35 38 43 49
2–5 21 24 33 36
6–15 15 14 19 23
Note: Data for 1994/95 were not available.
Source: Republic of Uganda (1992/93, 1993/94, 1995/96b, 1996/97).
Table A13.4. Annual Per Capita Household Medical Expenditure by

Income Quartile, 1992/93–1995/96
(constant dollars, US$1= U Sh 1,100)
Income quartile 1992/93 1993/94 1994/95 1995/96

Lowest 5.77 3.92 5.55 4.85
Second lowest 5.54 7.55 7.20 7.48
Second highest 7.27 10.18 12.89 9.30
Highest 11.02 12.07 19.04 15.37
Average 6.98 6.81 8.71 7.70
Source: National household surveys 1992–97.
438 Paul Hutchinson
Table A13.5. Probit Estimations of Illness and Use of Modern Curative

Care
Illness Modern curative care

Independent variables Coefficient Z Coefficient Z
Age 2–5 years (omitted = 0–1 year) –0.289 –12.707 –0.180 –4.856
Female –0.017 –0.771 0.063 1.670
Mother’s age –0.006 –3.078 –0.007 –2.210
Mother’s education 0.003 1.893 0.005 2.098
Income quartile (omitted =
lowest quartile)
Second lowest –0.029 –0.712 0.199 3.199
Second highest –0.032 –0.753 0.160 2.454
Highest –0.076 –1.592 0.227 2.976
Rural residence –0.036 –1.015 –0.108 –1.641
Water source (omitted = piped
in dwelling)
Borehole 0.089 1.809 n.a. n.a.
Natural source –0.030 –0.450 n.a. n.a.
Toilet (omitted = flush)
Pit latrine 0.017 0.270 n.a. n.a.
Other 0.148 1.970 n.a. n.a.
Facility characteristics
Distance from community n.a. n.a. –0.005 –1.339
Government ownership n.a. n.a. –0.118 –2.057
Price of basic consultation n.a. n.a. 0.000 –2.180
Have any doctors n.a. n.a. 0.063 0.955
Number of support staff n.a. n.a. 0.000 –0.681
Availability of vaccines n.a. n.a. 0.038 1.844
Physical appearance n.a. n.a. –0.015 –0.653
Year (omitted=1993/94)
1995/96 0.144 3.413 –0.078 –1.022
1996/97 0.297 6.818 –0.323 –4.265
Intercept –0.246 –2.584 0.839 5.365
Number of observations 14,591 n.a. 5,110 n.a.
Wald chi–squared statistic 288 n.a. 96.96 n.a.
Log likelihood –9,268.624 n.a. –3,114.11 n.a.
Note: The dependent variable “illness” is a dichotomous variable for whether or not an
individual reported illness. The dependent variable “modern curative care” is a dichotomous
variable for whether or not an ill individual used a modern health care provider.
Source: National household surveys 1993/94, 1995/96b, 1996/97.
Table A13.6. Simulations Using Probit Results for Use of Modern Curative Care
Predicted Percentage
Simulation probability change Type of change
Baseline 0.684
Increase price by 1 standard deviation 0.665 –2.8 By U Sh 357 from U Sh 266
If all facilities were government owned 0.671 –1.9 From 67 percent of facilities
If distance increased by 1 standard deviation 0.674 –1.5 By 5.8 km from mean of 3.7 km
If everyone was within 5 km 0.686 0.4 Mean reduced to 2.45 km from 3.7 km
439
If all facilities had doctors 0.695 1.5 From 53 percent of facilities
If all facilities had vaccines 0.710 3.7 From 50 percent of facilities
Individual and household characteristics
If all mothers had 1 more year of education 0.686 0.3 From mean of 3 years of primary school
If all mothers finished primary 0.695 1.6 From 59 percent completing primary
If mother’s education level increased by 1 standard deviation 0.705 3.0 By 7 years of schooling
If all mothers finished secondary 0.721 5.3 From 11 percent completing secondary
If all individuals were in highest income quartile 0.712 4.1 From 23.6 percent in highest income quartile
If average mother’s age increased by 1 standard deviation 0.667 –2.5 By 6.9 years from 27.9 years
Source: National household surveys 1993/94, 1995/96b, 1996/97.
440 Paul Hutchinson
Table A13.7. Probit Estimations of Use of Preventive Services, 1995/96

and 1997/98
Full DPT coverage, Prenatal care, women

children 0–1 years 12–45 years
Independent variable Coefficient Z Coefficient Z
Individual characteristics
Age (omitted = 0 years) 1.683 22.130 n.a. n.a.
Woman’s age (omitted = 12–17
years)
18–25 years n.a. n.a. 0.297 1.325
26–30 years n.a. n.a. 0.377 1.605
31–35 years n.a. n.a. 0.620 2.418
36–45 years n.a. n.a. 0.180 0.700
Female –0.024 –0.351 n.a. n.a.
Mother’s age –0.005 –0.966 n.a. n.a.
Mother’s education 0.009 2.534 n.a. n.a.
Education n.a. n.a. 0.010 1.820
Income quartile (omitted = lowest )
Second lowest 0.056 0.588 0.092 0.749
Second highest 0.194 2.018 0.246 1.985
Highest 0.174 1.499 0.209 1.398
Rural residence –0.143 –1.285 –0.121 –0.677
Distance from community –0.014 –2.486 0.014 0.187
Government ownership 0.017 0.192 –0.175 –1.653
Price of basic consultation 0.074 0.797 0.362 1.915
Have at least one doctor 0.177 1.952 0.102 1.086
Number of support staff 0.081 0.412 –0.047 –1.426
Functioning cold chain 0.044 1.043 0.118 1.891
Facility appearance –0.024 –0.741 –0.042 –0.923
1996/97 (omitted = 1995/96) 0.280 2.158 0.146 1.148
Intercept –1.362 –4.308 0.605 1.774
Observations 3,265 n.a. 2,247 n.a.
Wald chi-squared 621.890 n.a. 31.640 n.a.
Source: National household surveys 1995/96b, 1996/97.
Table A13.8. Orphanhood and Indicators of Child Welfare, 1995/96

(percent)
Full immunization Current school

Orphanhood Curative care coverage enrollment
Both parents alive 63 64 82
Only father alive 54 67 75
Only mother alive 57 60 77
None alive 37 57 75
Don’t know 30 61 55
Average 62 64 81
Age group Under 12 1 to 4 years 9 to 14 years
Source: National household survey 1995/96b.
Table A13.9. Probit Estimations of Use of Social Services by Children, 1995/96
Curative care Full immunization School enrollment

Independent variables Coefficient Z Coefficient Z Coefficient Z
Age
0–1 years 0.353 5.112 –0.618 –15.305 n.a. n.a.
2–5 years 0.173 2.858 n.a. n.a. n.a. n.a.
6–9 years –0.579 –13.275
Female 0.054 1.042 –0.005 –0.128 –0.093 –2.254
Mother’s age –0.004 –1.291 –0.007 –2.793 n.a. n.a.
Mother’s education 0.004 1.452 0.006 2.741 n.a. n.a.
Head of household is female n.a. n.a. n.a. n.a. 0.149 2.918
Highest education of any female household
member n.a. n.a. n.a. n.a. 0.019 9.147
442
Orphanhood status (omitted = both parents alive)
Father dead 0.095 0.913 –0.056 –0.596 –0.081 –1.168
Mother dead –0.302 –1.704 –0.327 –1.842 –0.055 –0.540
Both parents dead –0.281 –1.303 –0.222 –1.035 –0.260 –2.272
Don’t know if parents are dead n.a. n.a. n.a. n.a. 0.070 0.244
Income quartile (omitted = lowest)
Second lowest 0.214 3.160 0.298 6.009 0.377 6.778
Second highest 0.148 1.945 0.308 5.721 0.466 7.765
Highest 0.398 4.660 0.409 6.329 0.805 10.699
Rural residence –0.109 –1.064 –0.133 –1.905 –0.023 –0.473
Male agricultural wage n.a. n.a. n.a. n.a. 0.000 2.807
Female agricultural wage n.a. n.a. n.a. n.a. 0.000 0.382
Curative care Full immunization School enrollment

Independent variables Coefficient Z Coefficient Z Coefficient Z
Distance from community –0.006 –1.262 –0.003 –0.945 n.a. n.a.
Government ownership –0.138 –2.191 –0.010 –0.229 n.a. n.a.
Have at least one doctor –0.148 –2.000 0.086 1.656 n.a. n.a.
Price of basic consultation 0.000 2.133 0.000 –1.154 n.a. n.a.
Number of support staff 0.001 0.702 0.002 2.028 n.a. n.a.
443
Have inpatient 0.230 3.886 0.087 1.997 n.a. n.a.
Have cold chain 0.051 1.312 –0.033 –1.158 n.a. n.a.
School availability
Number of schools in village n.a. n.a. n.a. n.a. 0.063 2.365
Distance to school n.a. n.a. n.a. n.a. –0.006 –1.598
Intercept 0.071 0.393 0.070 0.565 0.082 0.943
Number of observations 2,623 4,821 4,844
Log likelihood –1,630.44 –3,092.90 –2,459.81
Age group 12 and under 5 and under 6 to 12 years
Source: National household survey data.
444 Paul Hutchinson
References
Akin, John S., David K. Guilkey, and E. Hazel Denton. 1995. “Quality of Ser-
vices and Demand for Health Care in Nigeria: A Multinomial Probit
Estimation.” Social Science and Medicine 40(11): 1527–37.
Akin, John S., David K. Guilkey, Paul Hutchinson, and M. McIntosh. 1998.
“Price Elasticities of Demand for Curative Health Care with Control
for Sample Selectivity on Endogenous Illness: An Analysis for Sri
Lanka.” Health Economics 7(6): 509–31.
Amooti-Kaguna, B., and F. Nuwaha. 2000. “Factors Influencing Choice of
Delivery Sites in Rakai District of Uganda.” Social Science and Medicine
50(2): 203–13.
Armstrong, Jill. 1995. Uganda’s AIDS Crisis: Its Implications for Development.
Discussion Paper no. 298. Washington, D.C.: World Bank.
Asiimwe, Delius, Francis Mwesigye, Barbara McPake, and Peter Striefland.
1996. “Informal Markets and Formal Health Financing Policy.”
Makerere Institute of Social Research, Kampala; Uganda Ministry of
Health, Entebbe; London School of Hygiene and Tropical Medicine,
London; and Royal Tropical Institute, Amsterdam.
Barnett, Tony, J. Tumushabe, G. Bantebya, R. S. Ssebuliba, J. Gnasongwa, D.
Kapinga, M. Ndelike, M. Drinkwater, G. Mitti, and M. Haslwimmer.
1995. “The Social and Economic Impact of HIV/AIDS on Farming
Systems and Livelihoods in Rural Africa: Some Experience and Les-
sons from Uganda, Tanzania, and Zambia.” Journal of International
Development 7(1): 163–76.
Barton, Thomas G., and Danstan Bagenda. 1993. “Family Household Spend-
ing Patterns for Health Care.” National Council for Children and the
United Nations Children’s Fund, Kampala. Processed.
Barton, Thomas G., and Gimono Wamai. 1994. Equity and Vulnerability: A Situ-
ation Analysis of Women, Adolescents and Children in Uganda. Kampala:
National Council for Children and the United Nations Children’s Fund.
Bukenya, Gilbert B. 1998. “Knowledge, Attitudes and Practice Study on
Immunisation Services in Uganda.” Health Management Consult
Uganda, Kampala.
Cassels, Andrew. 1997. “A Guide to Sector-Wide Approaches for Health De-
velopment: Concepts, Issues, and Working Arrangements.” World
Health Organization, Geneva. Processed.
Cockcroft, A. 1996. “Performance and Perceptions of Health and Agricul-

tural Services in Uganda: A Report Based on Findings of the Baseline
Services Delivery Survey.” World Bank; Community Information,
Empowerment, Transparency International; and World Bank Institute,
Washington, D.C.
DeRoeck, D., and A. Levin. 1998. “Review of Financing of Immunization Pro-
grams in Developing and Transitional Countries.” Special Initiatives
Report no. 12. Partnerships for Health Reform, ABT Associates, Inc.,
Bethesda, Maryland.
George, K., D. L. Hom, J. McGrath, J. L. Johnson, P. N. Mugyenyi, R. D.
Mugerwa, and J. J. Ellner. 1998. “Risk for HIV-1 Seroconversion in the
Ugandan People’s Defense Forces.” Paper read at the 12th World AIDS
Conference, June 28–July 3, Geneva.
Goliber, T. 1999. “Exploring the Implications of the HIV/AIDS Epidemic for
Educational Planning in Selected African Countries: The Demographic
Question.” The Futures Group International, Washington, D.C.
Gregson, S., B. Zaba, and G. Garnett. 1999. “Low Fertility in Women with HIV
and the Impact of the Epidemic on Orphanhood and Early Childhood
Mortality in Sub-Saharan Africa.” AIDS 13 (supplement A): S249–S257.
Guay, L., P. Musoke, T. Fleming, Danstan Bagenda, M. Allen, C. Nakabiito, S.
Joseph, P. Bakaki, C. Ducar, M. Deseyve, L. Emel, M. Mrochnick, M.
G. Fowler, L. Mofenson, P. Miotti, K. Dransfield, D. Bray, F. Mmiro,
and J. B. Jackson. 1999. “Intrapartum and Neonatal Single-Dose
Nevirapene Compared with Zidovudine for Prevention of Mother-to-
Child Transmission of HIV-1 in Kampala, Uganda: HIVNET 012
Randomised Trial.” The Lancet 354(9181): 795–802.
Hansen, A. B. E. 1995. “Cost-Sharing Initiatives in Tororo District: A Study of
User Charges for Health Services in Uganda.” Report no. 14. Diploma
of Medical Science Thesis, University of Aarhus, Department of Epi-
demiology and Social Medicine, Denmark.
Hay, Roger. 1998. “Health Services in Uganda.” Report to the Africa Region,
Macroeconomics 2, World Bank, Washington, D.C. Processed.
Hunter, Susan, and D. Fall. 1998. “Integrated District Planning for Vulner-
able Children in Uganda: Is it Enough?” Report of a Uganda Site Visit
by Children in Especially Difficult Circumstances team from the United
Nations Children’s Fund. New York. Processed.
Hutchinson, Paul. 1999a. “Decentralization of Health Services in Uganda:
Moving Towards Improved Delivery of Services.” In Health Care in
Uganda: Selected Issues. Discussion Paper no. 404. Washington, D.C.:
World Bank.
446 Paul Hutchinson
_____. 1999b. “Equity of Access to Health Services in Uganda: The Effects of

Income, Gender, Proximity to Services, and Quality of Care.” In Health
Care in Uganda: Selected Issues. Discussion Paper no. 404. Washington,
D.C.: World Bank.
_____. 1999c. “Malaria: A Priority Health Problem.” In Health Care in Uganda:
Selected Issues. Discussion Paper no. 404. Washington, D.C.: World Bank.
Jitta, J. 1996. “Evaluation of User Charges in Uganda.” Makerere University,
Child Health and Development Centre, Kampala. Processed.
Kaijuka, E. M., E. Z. A. Kaija, A. R. Cross, and E. Loaiza. 1989. Uganda Demo-
graphic and Health Survey 1988/1989. Ugandan Ministry of Health and
Institute for Resource Development and Macro Systems, Inc., Colum-
bia, Maryland.
Kilian, A. H. D., ed. 1995. “Summary of the Meeting on Malaria Control in
Kabarole and Bundibugyo Districts, Western Uganda.” Meeting re-
port. Ministry of Health and Deutsche Gesellschaft für Technische
Zusammenarbeit, March 14-15, Fort Portal, Uganda.
Konde-Lule, J. K., M. N. Tumwesigye, R. G. Lubanga. 1997. “Trends in Atti-
tudes and Behaviour Relevant to AIDS in Ugandan Community.” East
African Medical Journal 74(7): 406–10.
Langi, P., O. Lalobo, B. Mpeka, and G. Mpigika. 1994. “Malaria Situation
Analysis in Apac, Kampala and Rukungiri Districts, Uganda.” Minis-
try of Health and the United Nations Children’s Fund, Entebbe.
Macrae, J., A. Zwi, and L. Gilson. 1996. “A Triple Burden for Health Sector
Reform: ‘Post’-Conflict Rehabilitation in Uganda.” Social Science and
Medicine 42(7): 1095–1108.
Marseille, E., J. G. Kahn, F. Mmiro, L. Guay, P. Musoke, M. G. Fowler, and J. B.
Jackson. 1999. “Cost Effectiveness of Single-Dose Nevirapene Regi-
men for Mothers and Babies to Decrease Vertical HIV-1 Transmission
in Sub-Saharan Africa.” The Lancet 354(9181): 803–09.
McGrath, J. W., C. B. Rwabukwali, D. A. Schumann, C. Carroll-Pankhurst,
and J. Marks. 1991. “‘Zero-Grazing’ and ‘Loving Carefully,’ Baganda
Women’s Response to AIDS.” Paper presented at the 50th Meeting of
the Society for Applied Anthropology, March, Charleston, South Caro-
lina. Processed.
McPake, Barbara, Delius Asiimwe, Francis Mweisigye, Matthius Ofumbi,
Peter Striefland, and Asaph Turinde. 1999. “The Economic Behaviour
of Health Workers in Uganda: Implications for Quality and Accessi-
bility of Public Health Services.” Social Science and Medicine 49(7):
849–65.
Mugerwa, R. D., M. J. Mugerwa, E. Muhumuza, A. Musinguzi, B. Mbonye,

D. L. Hom, C. Day-Lally, M. Vjecha, and J. Ellner. 1994. “Correlates of
HIV 1 Infection Rates in Military Recruits in Uganda.” Poster P.C. 0344
presented at the 10th International Conference on AIDS, August 7-12,
Yokohama, Japan.
Mugyenyi, P. N., R. Mugerwa, A. Loughlin, J. L. Johnson, D. L. Hom, R.
Byaruhanga, R. Katongole-Mbidde, and J. J. Ellner. 1995. “WHO
Seroincidence Study in Preparation for HIV 1 Vaccine Trials in
Uganda.” Paper presented at the Ninth International Conference on
AIDS and STDs in Africa, December 10-14, Kampala.
Mugyenyi, P. N., D. Hom, A. Loughlin, J. L. Johnson, J. McGrath, K. George,
G. Svilar, R. D. Mugerwa, and J. J. Ellner. 1996. “HIV 1 Seroprevalence,
Incidence and Risk Behavior in the Ugandan Military.” Poster no.
Mo.C.1483 presented at the Eleventh International Conference on
AIDS, July 7-14, Vancouver, Canada.
Mutungadura, G., D. Mukurazita, and H. Jackson. 1999. “A Review of House-
hold and Community Responses to the HIV/AIDS Epidemic in the
Rural Areas of Sub-Saharan Africa.” UNAIDS Best Practice Collec-
tion. Joint United Nations Programme on HIV/AIDS, Geneva.
Mwesigye, Francis. 1996. “Effects of User Charges on Quality of Curative
Services in Rural Health Units in Uganda.” Ministry of Health, Health
Planning Department, Entebbe.
Okello, D. O., R. Lubanga, D. Guwatudde, and A. Sebina-Zziwa. 1998. “The
Challenge to Restoring Basic Health Care in Uganda.” Social Science
and Medicine 46(1): 13–21.
Okuonzi, S. A., and F. X. K. Lubanga. 1997. “Decentralization and Health
Systems Change in Uganda.” Ministry of Health, Entebbe, and Minis-
try of Local Government, Kampala.
Olsen, I. T., Dr. Olico-Okui, L. Atuyambe, and J. Konde-Lule. 1997. “Sustainability
of Health Structures and Systems in Sub-Saharan Africa: Uganda Case
Study.” United Nations Children’s Fund, New York. Processed.
Opio, A. A., G. Asiimwe-Okiror, J. Musinguzi, and E. Madraa. 1996. “A Re-
port on Declining Trends in HIV Infection Rates in Sentinel Surveil-
lance Sites in Uganda.” Ministry of Health, STD/AIDS Control
Programme, Entebbe.
Republic of Uganda. 1987. “Background to the Budget 1987/88.” Ministry of
Finance, Entebbe.
_____. 1992. “Surveillance of HIV and AIDS in Uganda: Annual Report 1992.”
Ministry of Health, AIDS Control Programme, Entebbe.
448 Paul Hutchinson
_____. 1992/93. “Integrated Household Survey 1992.” Ministry of Planning

and Economic Development, Statistics Department, Entebbe.
_____. 1993. “Inventory of Health Services in Uganda for the Year 1993.”
Ministry of Health, Entebbe
_____. 1993/94. “Social Dimensions of Adjustment Monitoring Survey 1993.”
Ministry of Finance and Economic Planning, Statistics Department,
Entebbe.
_____. 1994. “HIV/AIDS Surveillance Report.” Ministry of Health, STD/AIDS
Control Programme, Entebbe.
_____. 1995. Uganda Demographic and Health Survey 1995. Ministry of Finance
and Economic Planning, Statistics Department, Entebbe, and Macro
International, Calverton, Maryland.
_____. 1995/96a. “Health Management Information System.” Data collected
from Mukono and Kabale District Medical Offices. Ministry of Health,
Entebbe. Processed.
_____. 1995/96b. “Uganda National Household Survey 1995-96.” Ministry
of Finance and Economic Planning, Statistics Department, Entebbe.
_____. 1996/97. “Uganda National Household Survey 1996/97.” Ministry of
Planning and Economic Development, Statistics Department, Entebbe.
_____. 1996. “Burden of Disease, Cost-Effective Analysis, and Five-Year Pro-
jections in 13 Districts of Uganda.” Epidemiology Unit, Communi-
cable Disease Control, Planning Unit, Entebbe.
_____. 1997a. (February). “Health Expenditure in Uganda.” Ministry of Health,
Entebbe. Processed.
_____. 1997b. (March). “HIV/AIDS Surveillance Report.” STD/AIDS Con-
trol Programme, Ministry of Health, Entebbe. Processed.
_____. 1997c. “Inventory of Health Services in Uganda for the Year, 1996.”
Ministry of Health, Entebbe. Processed.
_____. 1998. “Health Policy Paper, Version XVII.” Ministry of Health, Entebbe.
Processed.
_____. 2000. “Health Sector Strategic Plan.” Ministry of Health, Entebbe,
Uganda. Processed.
Shuey, D. A., B. B. Babishangire, S. Omiat, and H. Bagarukayo. 1999. “In-
creased Sexual Abstinence among In-School Adolescents as a Result
of School Health Education in Soroti District, Uganda.” Health Educa-
tion Research 14(3): 411–19.
Topouzis, D. 1994. “Uganda The Socio-economic Impact of HIV/AIDS on
Rural Families with an Emphasis on Youth.” Consultant’s report. Food
and Agriculture Organization of the United Nations, Rome.
UNAIDS (Joint United Nations Programme on HIV/AIDS) and WHO (World

Health Organization). 1999. Epidemiological Fact Sheet on HIV/AIDS and
Sexually Transmitted Infections. http://www.unaids.org/hivaidsinfo/
documents.html
_____. 2000. Epidemiological Fact Sheet on HIV/AIDS and Sexually Transmitted
Infections. http://www.unaids.org/hivaidsinfo/documents.html
United Nations Development Programme. 1998. Human Development Report
1998. New York: Oxford University Press.
UNEPI (Uganda National Expanded Programme on Immunisations). 1999.
“Immunization Coverage for Children Ages 12–24 Months, 1994–
1997.” Entebbe.
Wabwire-Mangen, Fred, and Gakenia Wamuyu Maina. 1999. “Endemic,
Emerging and Re-emerging Communicable Diseases in Uganda.”
Development 42(4): 134–37.
World Bank. 1979. World Development Report 1979. Washington, D.C.: World
Bank.
_____. 1986. World Development Report 1986: The Hesitant Recovery and Pros-
pects for Sustained Growth, Trade and Pricing Policies in World Agricul-
ture, World Development Indicators. New York: Oxford University Press.
_____. 1987. Financing Health Services in Developing Countries: An Agenda for
Reform. World Bank Policy Study. Population, Health and Nutrition
Department, Policy and Research Division, Washington, D.C.
_____. 1988. World Development Report 1988: Opportunity and Risks in Manag-
ing the World Economy, Public Finance in Development, World Develop-
ment Indicators. New York: Oxford University Press.
_____. 1992. World Development Report 1992: Development and the Environment.
_____. 1993. Uganda Social Sectors. World Bank Country Study. Washington, D.C.
_____. 1997a. “Uganda Nutrition and Early Childhood Development Project.”
Project Appraisal Background Document. Africa Region, Human Re-
sources, Department, Washington, D.C.
_____. 1997b. World Development Report 1997: The State in a Changing World.
_____. 1999a. “Rapid Assessment of Data Availability in Health Care Units.”
In collaboration with Makerere Institute of Social Research, Kampala.
Processed.
_____. 1999b. “Uganda: The Sexually Transmitted Infections Project.” Africa
Region Findings no. 127. Washington, D.C. Available on http://
www.worldbank.org/afr/findings/english/find127.htm
Part V
Sustainability and Lessons

14
Beyond Recovery
As we argued in the introduction to this volume, Uganda’s performance on

the three elementary aspects of government behavior was remarkable dur-
ing the 1990s. First, the government provided a reasonable level of internal
peace where previously had been large-scale violence. Second, it rescinded
predatory taxation by removing a massive implicit tax on exports. Third, it
provided the public good of a currency, the value of which did not dramati-
cally erode. While these three achievements may sound modest, the diffi-
culty of attaining them was considerable. Each of them took a triumph of
government leadership against the weight of past behavior and the conduct
of neighboring countries.
Securing internal peace required both economic reforms, which reduced
the financial viability of rebel organizations, and political reforms, which gave
potential rebel leaders a role within the regime. Rescinding predatory taxa-
tion required the dismantling of both foreign exchange controls and crop
marketing monopolies, behind each of which were powerful rent-seeking
beneficiaries. Providing a sound currency required the transformation of a
chaotic pattern of public spending into one in which aggregate expenditures
could not significantly exceed revenues. The implementation of all three of
these revolutionary changes within a decade was a remarkable political and
technocratic achievement.
Of course, internal security, the absence of predatory taxation, and the
provision of a sound currency are woefully insufficient for prosperity. How-
ever, the National Resistance Movement inherited such a desperate economy
that these three changes were sufficient to propel Uganda into a phase dur-
ing which the growth rate was among the highest in the world. By 2000, the
country has approximately recovered the per capita income level that the
453
economy experienced when achieving independence in 1962, but it has not

yet reached the peak level of 1970.
Unfortunately, even this recovered level is so low that almost half the
population lives in poverty. The evidence from agricultural households and
industrial firms shows why Ugandans remained poor. At every turn, the typi-
cal economic activity was handicapped by the weakness of other public and
private activities. Farmers faced food markets in which transaction costs were
often prohibitive. Manufacturers faced a hopelessly erratic electricity sup-
ply. The sick faced health care that was sparse, predatory, and of poor qual-
ity. Children attended schools in which learning even the basic skills was a
major accomplishment. Underlying these problems were an inherited lack of
investment and an inherited pattern of opportunistic behavior that spanned
the public-private divide.
The cumulative effects of public underinvestment showed up predomi-
nantly in infrastructure and education. For example, transaction costs were
high in food markets because there were few roads, and electricity was
erratic because no new power station had been built for more than 30 years.
The cumulative effects of low private investment were perhaps even more
pervasive. For example, the rural network of shops and banks was mini-
mal. However, because they were interdependent, the returns on any single
investment were depressed by the lack of other investment. Therefore, de-
spite these chronic shortages of capital, the incentive to invest was not par-
ticularly high.
In the public sector, the inherited norm of opportunism shackled the abil-
ity to deliver reasonable services. Public sector behavior that received the
most attention in terms of reform and most affected those economic agents
best able to stand up for themselves, namely, tax collection from large firms,
produced mixed results. Corrupt public officials in the tax administration
and elsewhere target for extortion those firms that are making investments,
so that corruption becomes like an erratic investment tax. As a result, corrup-
tion was more than three times as damaging to investment than the underly-
ing corporate taxation received by the government. In those parts of the pub-
lic sector to which less reforming attention has been given and with economic
agents less capable of standing up for themselves, corrupt behavior reached
debilitating proportions. For example, in the mid-1990s, 78 percent of the
medical supplies sent to public health clinics were expropriated by the health
workers who were supposed to dispense them to patients.
In the private sector, the inherited norm of opportunism was most de-
bilitating for the banking system. Accountants could not be trusted to pro-
duce honest audits, so profit statements were unreliable as a guide to lend-
ing, and the legal system could not be trusted to let banks foreclose on
assets pledged as collateral. As a result, loan default rates were extraordi-
narily high, so even with very wide interest rate spreads and limited lend-
ing, banks were at risk of failure.
Beyond Recovery 455
The challenge to which the Ugandan government rose so successfully

during the 1990s was that of recovery; today it faces a quite different set of
challenges. The achieved agenda can be characterized as peace and prices;
the forthcoming agenda is investment and behavioral change. However, this
generalized summary fails to acknowledge that the Ugandan government
has already embarked upon an agenda beyond recovery and that its perfor-
mance has demonstrated that it can attain the new objectives as effectively as
it attained the old ones.
Both public and private investment is recovering. The major public in-
vestment initiative is probably that in primary education. The recent imple-
mentation of free primary education has increased net enrollment rates to
nearly 100 percent. Earlier in this volume it was shown that primary educa-
tion substantially raises incomes regardless of the sector in which people are
employed. The expansion in enrollment has benefited predominantly the
poorest households, and so is a particularly well-targeted public investment
in poverty reduction. The major private investment initiatives are in indus-
tries that were, until recently, reserved for the public sector: electricity and
telephones. The entry of private capital into electricity generation has been
dramatic: a hydropower project that will constitute the largest single private
investment ever undertaken in East Africa is about to be launched. Thus, a
landlocked, postconflict economy without significant mineral deposits or
tourism opportunities is leapfrogging its neighboring countries, which have
none of these disadvantages.
The entry of private capital into telecommunications has been no less dra-
matic. Two private companies offer mobile phone systems that function across
most of Uganda. At present, these mobile phones provide any village in most
of Uganda with better access to telecommunications than is available in Nairobi,
Kenya. As expected with electricity, private participation in telecommunica-
tions has enabled Uganda to leapfrog the neighboring Kenya in this sector.
One measure of the climate for private investment is the risk ratings as
constructed through a poll of international investor opinion by the magazine
Institutional Investor. This is not an accurate assessment of the true climate.
As Ul Haque, Nelson, and Mathieson (2000) show, these ratings are system-
atically biased against Africa. Nevertheless, they are probably an accurate
assessment of investor opinion, which is important. As of 1992, the risk rat-
ing for Uganda was only 5 on a scale of 0–100, which was the lowest rating of
the 25 African countries the magazine included. It was one of the worst rat-
ings in the world. By 2000 the rating had improved to 23. In the process,
Uganda had again leapfrogged many African countries. For example, Uganda
is almost at par with Kenya and Zimbabwe, which evidently have superior
infrastructure and do not have a similar legacy of conflict. Although the rat-
ing is about half that normally associated with emerging economies, the im-
provement demonstrated that a major impact is possible in less than a de-
cade. Thus aiming for ratings in the emerging economy range (mid-40s) by
2010 is a reasonable target. Closer scrutiny of the ratings suggests that confi-
dence would have been substantially higher but for the recent war in the
Democratic Republic of Congo.
The government has also embarked upon the difficult task of inducing
behavioral change. Within the public sector the primary target of reform
has been tax collection. The strategy adopted was to create a new institu-
tion, the Uganda Revenue Authority. This strategy deserves commenda-
tion. It enables a coordinated change in expectations of behavior at the level
of a single institution, without having to coordinate behavior change across
the public sector as a whole. The evidence of continued severe corruption
in tax collection points not necessarily to an error of strategy, but to the
difficulty of achieving the goals.
A more successful reform has been the scrutiny of public service delivery
to primary schools. As discussed earlier in this volume, in 1995 only 20 per-
cent of the money released by the Ministry of Finance for nonsalary uses in
primary schools was actually reaching the schools. By 1999 it had risen to
more than 90 percent. This remarkable achievement was accomplished mainly
by sharing the information on expenditures with the local population. Civil
society thus became the power disciplining the civil service. This surely gives
some guidance about how public service delivery can be improved in the
future: pressure from users is probably more effective than centralized ad-
ministrative scrutiny of expenditures.
The anticorruption drive, which has included measurement of perceived
corruption for each public institution, a prominent police inquiry, and ac-
tive press coverage, again demonstrates an effective government initiative.
Many corrupt officials or politicians have recently been removed from of-
fice, but their prosecution and recovery of misused public funds tend to be
delayed or unaccomplished. This is partly because capacity and financial
resources are extremely limited. Recognizing this, the government’s strat-
egy is to catch a few “big fish” to signal strongly the change in attitudes
toward corruption. However, there is more to the fight against corruption
than just the lack of capacity or funds. For example, a few top officials who
were removed because of mismanagement and corruption—but not pros-
ecuted and imprisoned—are actively seeking elected public office with con-
siderable popular support. Undoubtedly, behavioral change will be diffi-
cult and time consuming to accomplish.
Studies presented in this volume demonstrate that household charac-
teristics, such as educational attainment and asset ownership, appear to
have been more important factors for income growth and market partici-
pation than location-specific characteristics, such as availability of roads,
telephones, or credit. This finding has clear policy implications. While road
construction remains a public expenditure priority, social services are in-
creasingly gaining importance. Sector programs are being developed in
health and education to eliminate duplications by various donor agencies.
Beyond Recovery 457
There is a clear recognition that public spending needs to be translated into

services that, in turn, need to be produced in a more cost-efficient manner.
Where public action is hard to achieve, there is a larger role for the private
sector in service provision. Increased transparency and involvement of
groups outside the government in public policy and service delivery are
promising developments. A major improvement is required in health ser-
vices, in part, to cope with the HIV/AIDS pandemic.
Uganda’s transformation into a modern economy will require both rural
development as well as a shift from agriculture to industry and services. This
shift is not yet occurring and is not likely to occur without strong growth and
investment in the firm sector. This requires increasingly business-friendly
public policy as well as considerably more efficient public infrastructure and
other services.
The sectoral change in the economy to date has reflected recovery rather
than transformation. The sectors that have expanded most rapidly have been
government services and construction; however, in each case this reflects the
extraordinarily low levels that had been reached by the mid-1980s. Govern-
ment services have expanded as a share of gross domestic product (GDP)
because tax revenue has approximately doubled as a share of GDP from the
previous extremely low level of 5 percent. Similarly, foreign aid has allowed
an additional increase in government services. Construction has expanded
rapidly because of the recovery of investment from similarly low levels. Each
case of increased share can be seen as a consequence of economic recovery:
tax revenue and investment are simply disproportionately sensitive. Within
agriculture, the restoration of peace has induced a gradual return to the mar-
ket, and the removal of predatory taxation has induced the recovery of ex-
port crops, notably coffee. Within manufacturing, the restoration of peace
and the provision of a stable currency have enabled the recovery of the basic
activities that normally serve local demand.
All these recovery processes can be expected to continue. After all, the
economy has not as yet recovered the peak reached in 1970; thus, considerable
scope remains for further recovery-based growth. However, over the next de-
cade Uganda can be expected gradually to exhaust the opportunities for growth
through recovery. The growth path could simply continue where it had left off
in the early 1970s: further expansion in coffee and other primary commodity
exports and further growth in manufacturing for local demand. However, it is
worth speculating upon other scenarios for sector growth, partly because con-
tinued growth based upon primary commodity exports and manufactures for
the local market may be neither desirable nor plausible.
Continued dependence upon a few primary commodity exports is prob-
ably undesirable because evidence suggests that such dependence tends to be
associated with volatility, poor governance, and civil conflict. The scope for
manufacturing growth is surely limited because Uganda is landlocked and
adjacent to a coastal economy with a much larger manufacturing sector that is
now integrating into a free trade area. Being landlocked, Uganda is unlikely to
be competitive in world markets for manufactures. Having recently joined a
free trade area, which includes the industrial agglomeration of Nairobi, Uganda
is likely to lose manufacturing market share within the region, as experienced
in other such arrangements (World Bank 2000). Ugandan manufacturing may
become the main agglomeration for the emerging geopolitical market of
Uganda, the Democratic Republic of Congo, and Rwanda. However, transport
costs are high within this region and incomes are low, so this agglomeration is
unlikely to constitute a major market for Ugandan-produced manufactures.
Because Uganda is likely to continue to have a relatively small exposure
to world trade, the core of its growth strategy need not be export oriented.
The main nontraded good is food. Ugandan food production, and indeed,
agriculture more generally, probably has considerable scope for intensifica-
tion. To date, agricultural recovery has not been knowledge intensive. While
agricultural research has improved productivity elsewhere in the world, this
research has yet to be applied in Uganda, and the locally-based research ef-
fort has still not been rebuilt. Food production is the major sector of the
economy and is disproportionately important for the livelihoods of the poor.
Hence, harnessing the stock of unutilized opportunities for productivity
growth may sustain growth for many years.
In the long run, much of Uganda’s trade is likely to be regional. As dis-
cussed earlier, regional integration is unlikely to offer many opportunities to
Uganda for manufacturing, but it is likely to offer opportunities in two other
sectors: food and services. Uganda is already competitive in regional food
markets but has been hit by periodic Kenyan import restrictions. If regional
integration can curtail such behavior, a pattern of regional trade in which food
is exported in return for manufactures seems likely. A second opportunity for
exports is as the regional center for the provision of the service industries. The
twin pillars of the 21st century service economy appear to be good telecom-
munications and good tertiary education. In each of these sectors Uganda has
reasonable prospects of becoming the regional leader. In telecommunications,
it is already ahead in mobile phone provision because its land-based telephone
network is significantly deficient. In tertiary education it simply has to recover
the leadership position that Makerere University held until around 1970. Re-
cent reforms in the financing of the university, making it both better financed
and much more responsive to student demand, suggest that this is feasible.
Several privite universities have also sprung up recently.
In international export markets, Uganda is potentially competitive in those
products that are sufficiently valuable or perishable to warrant air freighting
or can be transported electronically. Here the constraint upon exporting is
not geography, but the physical and institutional supporting infrastructure.
If, for example, Uganda is to succeed as a fish exporter, it will need both
good refrigeration facilities and trustworthy mechanisms of scrutiny and
enforcement of health standards. Perhaps the horticulture export industry of
Beyond Recovery 459
Kenya and the data processing export industry of Bangalore, India, offer fea-
sible models for new export sectors.
This agenda for sectoral growth—intensification of agriculture, service
exports to the region, and new agro-based international exports—calls for
improvements in institutions and infrastructure. The transactions needed
for coffee exporting are much less complex than the transactions needed
for the transmission of agricultural advice, for cross-border trade in ser-
vices, and for the export of goods highly sensitive to quality and time. The
graduation to more complex transactions places greater demands upon the
institutions and the professions needed for a market economy. Similarly,
coffee exporting is relatively undemanding of infrastructure: the high value-
to-weight and durability of coffee make exporting viable even with poor
roads. Regional and domestic trade in food is much more sensitive to trans-
port costs, while exports of horticulture and services are even more depen-
dent upon infrastructure.
To conclude, during the 1990s Uganda grew rapidly by harnessing the
opportunities for recovery. The recovery was achieved by a remarkable ef-
fort of government renewal. Overcoming enormous difficulties, the govern-
ment supplied peace and a stable currency, and ended the predatory taxa-
tion of exports. We have suggested that as Uganda is now approaching its
previous economic peak, the opportunities for recovery are diminishing. The
recipe of peace and prices, which has been sufficient for recovery and is surely
necessary for continued rapid growth, may now be insufficient. Sustaining
rapid growth will require a higher rate of investment. In turn, the opportuni-
ties for increased investment may depend upon broadening from the coffee-
manufacturing economic core of the 1990s recovery. We have suggested that
food-services-horticulture may become the growth axis for the economy.
However, this transformation would need a second wave of government re-
newal, commensurate with that already achieved. The new economic axis
would require complex transactions, much more intensive in information
and much more dependent upon infrastructure, than the existing economy
and will require a much better level of government service delivery. We have
summarized this next phase as investment and behavioral change. As indi-
cated earlier, the government has already embarked on this second phase
with early signs of success.
Was the sequence of peace and prices followed by investment and behav-
ioral change appropriate? We think that in Uganda’s circumstances it was.
The National Resistance Movement government inherited a society in which
improvements in service delivery would inevitably take a long time, while
there were huge opportunities for rapid poverty reduction through ending
predatory taxation, providing a stable currency, and achieving peace. In the
process of achieving these limited but important objectives, the government
has acquired the competence, the mandate, and the confidence to tackle the
more difficult tasks it now faces.
References
Haque, Nadeem Ul, Mark Nelson, and Donald J. Mathieson. 2000. “Rating
Africa: The Economic and Political Content of Risk Indicators.” In Paul
Collier and Catherine Pattillo, eds., Investment and Risk in Africa. Lon-
don: Macmillan.
Institutional Investor, Inc. Institutional Investor. Various years. New York.
World Bank. 2000. “Trade Blocs.” Policy Research Report. Washington, D.C.
Appendixes
Appendix A
Household Surveys
The government of Uganda began monitoring living standards through the

integrated household survey in 1992. This was a large survey, both in the size
of the sample (10,000 households) and the number of topics addressed (con-
sumption, income, employment, health, education, time use, fertility, and so
on). A particularly notable feature of the survey was the large number of
communities covered: 1,000 enumeration areas were surveyed. The commu-
nity survey portion of the questionnaire covered related topics, including
local markets; demographics; infrastructure; credit; and social infrastructure
related to education, health, and other social services.
Each year thereafter there has been a monitoring survey covering around
5,000 households and a shortened questionnaire that focuses mainly on con-
sumption information. The data from four monitoring surveys (MS-1, MS-2,
MS-3, and MS-4) are now available. The monitoring surveys were primarily
designed to provide information on changes in poverty over time measured
by private household consumption.
All five surveys relied on similar sampling procedures and questionnaires.
A number of surveys included a socioeconomic survey of households, a com-
munity survey, and a household enterprise survey (see table A1).
The 1999/2000 Uganda national household survey was completed in late
2000. It has the goal of providing a comprehensive update on living condi-
tions in Uganda that could form a basis for policymaking in a framework of
increased decentralization and of guiding policy in rural areas and the agri-
culture sector, where previously coverage has been limited and has suffered
from major shortcomings.
This survey contains a number of innovative features. Global positioning
system receivers were used to record the spatial coordinates of all house-
holds included in the survey. This will facilitate linking the household
463
Table A1. Summary Information on the Household Surveys in 1992/93–1997/98
Integrated First Second Third Fourth

household survey, monitoring survey, monitoring survey, monitoring survey, monitoring survey,
Item IHS MS-1 MS-2 MS-3 MS-4
Duration Feb. 1992 to Mar. Aug. 1993 to Feb. Jul. 1994 to Mar. Sep. 1995 to Jun. Mar. 1997 to Feb.
1993 1994 1995 1996 1998
Sample size
(usable
observations) 9,924 5,038 4,910 5,435 6,494
Major omissions in Omitted Kitgum Omitted Kitgum Omitted Gulu,
geographic district district Kasese, Kitgum,
coverage Bundibugyo
464
Minor differences in Omitted some rural Omitted parts of
geographic areas of Kabale Kasese, Kisoro,
coverage district Kotido, Moroto
Intended panel Base round Half of the sample As MS-1 As MS-2 No panel element
feature intended to be from
same enumeration
areas and of these
half intended to be
same households
Nonstandard Covers many Some qualitative Some qualitative
features of topics, such as measures of measures of
household anthropometrics poverty poverty
questionnaire
Table A1 continued
Integrated First Second Third Fourth

household survey, monitoring survey, monitoring survey, monitoring survey, monitoring survey,
Item IHS MS-1 MS-2 MS-3 MS-4
Other questionnaires Household Household Crop questionnaire; Labor force
465
enterprise enterprise community questionnaire
questionnaires; questionnaires; questionnaire
community community
questionnaires questionnaires
Note: The government’s intention was to carry out the fourth monitoring survey (MS-4) in 1996/97, hence most printed material available on this survey
refers to 1996/97. However, the actual implementation of MS-4 was postponed until 1997/98.
Source: Uganda Bureau of Statistics.
466 Appendix A
survey information to spatial information from digital maps on infrastruc-

ture, vegetation, and soil fertility. It could also be used to draw subsamples
that might be of special interest for reinterviews in the future. Furthermore,
in addition to including a panel element of about 1,250 households that were
interviewed already in 1992, the survey also contains a number of retrospec-
tive questions, at the household as well as at the community level, that would
permit identifying changes and households’ responses to them. At the house-
hold level changes in asset endowments, household composition (including
deaths), and other shocks are the most prominent. At the community level,
information is obtained on changes in productive structure, access to infra-
structure, and civil strife.
Appendix B
The Uganda Enterprise Survey
A private enterprise survey for Uganda was carried out between February
and June 1998 jointly by the World Bank and the Ugandan Private Sector
Foundation. The survey design benefited from the Regional Project for En-
terprise Development model, particularly the Ghana and Zimbabwe surveys,
but was more limited in scope (Biggs and Srivastava 1996). The Uganda sur-
vey focused mostly on physical investment, exports, infrastructure services,
taxation, policy credibility, regulation, and corruption. However, the survey
in Uganda covered a wider range of industrial sectors than the Regional
Project for Enterprise Development. Apart from manufacturing, which was
divided into agroprocessing and other manufacturing, the survey included
firms representing tourism, commercial agriculture, and construction, as these
sectors were expected to have substantial growth potential.
Data were collected for 1995–97. Because the survey required confiden-
tial information—such as firms’ costs, sales, and tax payments—interviews
were carried out by the Uganda Manufacturers Association to obtain maxi-
mum cooperation of the firms. Enumerator training was emphasized, and a
questionnaire was carefully piloted beforehand. In addition to quantitative
data, the survey also collected information on firms’ perceptions on various
constraints to investment. The latter component was modeled on a similar
survey carried out in 1994 by the World Bank, allowing an examination of
dynamics of the business environment and constraints, as perceived by the
private sector (World Bank 1994a).1
1. A separate foreign investor survey has also been conducted twice by the World
Bank, first in 1994 and then in 1999, to collect information on foreign firms’ perceptions
467
468 Appendix B
The latest complete industrial census in Uganda dates back to 1989. An

updated industrial census was carried out in 1996, but it included only 8 out
of the 39 districts in existence at that time. Despite its limited geographical
coverage, the districts included in the 1996 update represented 80 percent of
value added in the private industrial sector and 70 percent of employment
according to the 1989 census. It was thus decided to base the sampling frame
of the survey on the 1996 update instead of the complete but much older
census, particularly as the number of new enterprises had increased dra-
matically in the past decade. Based on the 1996 update, 37 percent of the
active firms were established since 1990. Although the district of Mbarara
was not included in the census update, it was added to the survey because of
its importance as a regional business center today.
The firm survey was confined to five sectors—commercial agriculture
(includes fishing), agroprocessing, other manufacturing, construction, and
tourism. Table B1 shows the distribution of establishments and employment
by firm size and sector in the 1996 updated industrial census. Firm size was
Table B1. Private Sector Enterprises Based on the 1996 Updated

Industrial Census
Enterprises Employment
Share Share
Category Number (percent) Number (percent)
By firm size
Small (5–20) 1,957 79.8 16,893 24.9
Medium (21–100) 405 16.5 16,980 25.0
Large (> 100) 89 3.6 34,048 50.1
Total 2,451 100.0 67,921 100.0
By sector
Five chosen sectors 1,282 52.3 52,535 77.3
Mining 17 0.7 1,024 1.5
Wholesale and retail 753 30.7 9,565 14.1
Transport 94 3.8 1,796 2.6
Financial intermediation 23 0.9 344 0.5
Business activities 98 4.0 1,861 2.7
Other 184 7.5 796 1.2
Total 2,451 100.0 67,921 100.0
Source: Uganda Bureau of Statistics data.
on Uganda’s strengths and weaknesses as a place to invest. Representatives of enter-

prises from Africa, Asia, Europe, and North America and were interviewed (World
Bank 1994b, 1999).
Appendix B 469
defined by employment. Neither the update nor the 1989 census included
firms with less than five employees, so the initial size breakdown was small
(5 to 20 employees), medium (21 to 100 employees), large (101 to 500 em-
ployees), and very large (more than 500 employees). Subsequently, large and
very large firms were treated as one group. The five sectors selected for the
survey cover 52 percent of all enterprises included in the census update and
almost 80 percent of employment.
Table B2 shows the distribution of establishments and employment within
the five selected industrial sectors by firm size and sector. The within sector
distribution of employment shows large variations across sectors. Most of
the employment within commercial agriculture and construction is concen-
trated in two to three very large firms, while most of the employment in
tourism is in small firms. Employment in agroprocessing and other manu-
facturing is relatively evenly distributed across firm size.
The following criteria were taken into account when a stratified random
sample for the survey was constructed:
• The sample should be reasonably representative of the population of
establishments in the five specified industrial categories.
• The establishments surveyed should account for a substantial share
of national output in each of the industrial categories.
• The sample should be sufficiently diverse in terms of firm size.
• There should be enough representation outside Kampala to draw con-
clusions about industrial activity in Uganda as a whole.
The final sample consisted of 243 surveyed firms and was similar in size
and regional distribution to the stratified sample constructed initially. The
characteristics of the sampled firms are set out in table B3 by firm size, sector,
location, and ownership. More than 80 percent of large firms, about 30 per-
cent of medium-size firms, and approximately 10 percent of small firms in
the five sectors were surveyed. Five different geographical areas were cov-
ered: Kampala, Jinja-Iganga, Mbale-Tororo, Mukono, and Mbarara. The first
four make up 98 percent of total employment in the five selected sectors re-
ported in the 1996 census update. In terms of ownership, which was not a
criterion for sample selection, 70 percent of firms were Ugandan owned, 16
percent were foreign owned, and 14 percent were jointly owned. Table B4
presents the distribution of establishments and employment in the final
sample by sector and size of the firm.
The survey typically consisted of at least two visits to each firm by one
or two enumerators. While the manager’s perceptions were relatively easy
to obtain during a single interview, quantitative data on costs, sales, and
taxation, which were collected for three years, usually required another
visit to consult the accountant. During the course of the survey it was found
that a number of firms had changed business activity since 1996, for ex-
ample, by shifting to trading instead of manufacturing. Also, a number of
firms were difficult to locate; either they had gone out of business since
Table B2. Distribution of Establishments and Employment Within the Five Selected Industrial Sectors, 1996
Small (5–20) Medium (21–100) Large (101–500) Very large (>500) Total
Share Share Share Share Share
Sector Number (percent) Number (percent) Number (percent) Number (percent) Number (percent)
Commercial agriculture
Establishments 39 61 13 20 7 11 5 8 64 100
Employment 457 3 385 3 1,385 10 11,326 84 13,553 100
Agroprocessing
Establishments 265 66 113 28 20 5 5 1 403 100
Employment 2,358 16 4,933 33 3,346 22 4,332 29 14,969 100
Other manufacturing
470
Establishments 493 74 145 22 29 4 2 0 669 100
Employment 4,227 25 6,121 37 5,181 31 1,053 6 16,582 100
Construction
Establishments 32 60 13 25 6 11 2 4 53 100
Employment 339 6 601 10 1,397 23 3,818 62 6,155 100
Tourism
Establishments 82 88 10 11 1 1 0 0 93 100
Employment 739 58 417 33 120 9 0 0 1,276 100
Total
Establishments 911 71 294 23 63 5 14 1 1,282 100
Employment 8,120 15 12,457 24 11,429 22 20,529 39 52,535 100
Source: 1996 updated industrial census, Department of Statistics, Entebbe.
Appendix B 471
1996 or had moved to another address, or the 1996 industrial census up-
date may have contained firms from the 1989 census that had gone out of
business. A few firms refused to participate in the survey. For all these rea-
sons, 39 percent of the firms in the final sample were randomly chosen
alternates to the initially drawn random sample.
Table B3. Characteristics of the Firms in the Sample
Enterprises Employment
Share Share
Category Number (percent) Number (percent)
By firm size
Small (5–20) 93 38.3 990 3.3
Medium (21–100) 86 35.4 4,293 14.3
Large (>100) 64 26.3 24,788 82.4
Total 243 100.0 30,071 100.0
By sector
Commercial agriculture 28 11.5 2,137 7.1
Agroprocessing 58 23.9 12,792 42.5
Other manufacturing 102 42.0 7,748 25.8
Construction 26 10.7 6,240 20.8
Tourism 29 11.9 1,154 3.8
Total 243 100.0 30,071 100.0
By location
Kampala 130 53.5 18,602 61.9
Jinja-Iganga 45 18.5 3,806 12.7
Mbale-Tororo 19 7.8 2,382 7.9
Mukono 24 9.9 3,801 12.6
Mbarara 25 10.3 1,480 4.9
Total 243 100.0 30,071 100.0
By ownership
Ugandan 170 70.0 9,477 31.5
Foreign 39 16.0 11,700 38.9
Joint 34 14.0 8,894 29.6
Total 243 100.0 30,071 100.0
Table B4. Distribution of Establishments and Employment of the Firms Included in the Survey Sample
Small (5–20) Medium (21–100) Large (101–500) Total

Share Share Share Share
Sector Number (percent) Number (percent) Number (percent) Number (percent)
Commercial agriculture
Establishments 13 46 10 36 5 18 28 100
Employment 122 6 554 26 1,461 68 2,137 100
Agroprocessing
Establishments 18 31 18 31 22 38 58 100
Employment 214 2 911 7 11,667 91 12,792 100
Other manufacturing
472
Establishments 42 41 38 37 22 22 102 100
Employment 453 6 1,760 23 5,535 71 7,748 100
Construction
Establishments 3 12 12 46 11 42 26 100
Employment 22 0 641 10 5,577 89 6,240 100
Tourism
Establishments 17 59 8 28 4 14 29 100
Employment 179 16 427 37 548 47 1,154 100
Total
Establishments 93 38 86 35 64 26 243 100
Employment 990 3 4,293 14 24,788 82 30,071 100
Source: 1998 firm survey.
Appendix B 473
References
Biggs, Tyler, and Pradeep Srivastava. 1996. Structural Aspects of Manufactur-
ing in Sub-Saharan Africa: Findings from a Seven Country Enterprise Sur-
vey. Discussion Paper no. 346, Africa Technical Department Series.
World Bank. 1994a. “The Private Sector in Uganda: Results of the World Bank
_____. 1994b. “Eastern Africa—Survey of Foreign Investors.” Report prepared
by Economisti Associati (Italy) for Eastern Africa Department. Wash-
ington, D.C.
_____. 1999. “Uganda Survey of Foreign Investors.” A report prepared by
Consorzio Italiano Consulenti for Africa Region, Macroeconomics 2.
Washington, D.C.
1
List of Table, Figures, and Boxes
Tables
2.1 The Risk of Civil War in the Ensuing Five Years, 1970,
1986, and 1999 ................................................................................ 18
2.2 The Level and Composition of Economic Activity,
Selected Years ................................................................................. 20
2.3 The Predicted Change in Flight Capital as a Proportion of
Ugandan Private Wealth, 1985 and 1998 ................................... 29
2.4 Capital Flight and Repatriation, 1991–97 ....................................... 30
2.5 Investment as a Share of GDP at Market Prices, Fiscal Years
1986/87–1997/98 ........................................................................... 40
2.6 Export Shares of GDP, Fiscal Years 1990/91–1997/98 .................. 41
2.7 Foreign Currency Inflows, Fiscal Years 1989/90–1998/99 .......... 42
3.1 Inflation, Investment, and Growth before and after the
Achievement of Stability .............................................................. 57
3.2 Actual Budget and Cash Flow Out-Turn, 1991/92–1996/97 ....... 61
3.3 Information Lags, Cash Flow Compilation, and Short-Term
Macroeconomic Management ..................................................... 63
4.1 Estimates of Private Consumption Per Capita .............................. 88
4.2 Derivation of the Food Poverty Line .............................................. 91
4.3 Poverty Lines ...................................................................................... 92
4.4 Poverty in the Integrated Household Survey ................................ 93
4.5 Poverty Rates in MS-1 ....................................................................... 94
4.9 T-Test Statistics for Hypothesis of Equality of Poverty
Statistics in IHS and MS-4 ............................................................ 98
475
476 List of Tables, Figures, and Boxes
4.10 Consumption Per Adult Equivalent at Each Decile .................... 103

4.11 Gini Coefficients for Uganda .......................................................... 105
4.12 Poverty by Sector of Household Head, IHS ................................ 107
4.13 Poverty by Sector of Household Head, MS-3 .............................. 108
4.14 Sectoral Decomposition of Changes in Poverty between
IHS and MS-3 ................................................................................ 111
A4.1 Adjusted Comparison of Mean Consumption Per Capita .......... 114
A4.2 Daily Calorific Requirements and Equivalence Scales ................ 117
5.1 Income Sources for Panel Households by Region, 1992
and 1999 ........................................................................................ 139
A5.1 Changes in Extent of Production, Number of Producers,
and Yields of Main Commodities, 1992–99 ............................. 155
A5.2 Changes in Technology and Input Use, 1992–99 ......................... 160
A5.3 Changes in Functioning of Credit and Land Markets,
1992–99 ......................................................................................... 163
A5.4 Changes in Access to Infrastructure, Services, and
Governance, 1992–99 .................................................................. 166
A5.5 Determinants of Household-Level Income Growth,
1992–99 ......................................................................................... 169
A5.6 Results from the Agricultural Production Function
Estimation .................................................................................... 170
A5.7 Demand Functions for Fertilizer, Seeds, and Hired Labor ........ 172
A5.8 Probit Estimates for the Probability of Enterprise Startups
in 1987/88–1992/93 .................................................................... 173
6.1 Percentage of Ugandan Households Engaged in Farming,
1992 ............................................................................................... 179
6.2 Number of Farms by Share of Output Marketed ........................ 181
6.3 Share of Crop Marketed, by Crop ................................................. 183
6.4 Model Results for 1992/93 Survey ................................................ 186
6.5 Explaining Differences in Average Community Price Levels ... 189
6.6 Community Prices: Crop Model Estimation Results .................. 190
6.7 Market Participation: Household Tobit Results .......................... 192
6.8 Estimated Fixed Commodity Effects ............................................. 193
6.9 Welfare Effect of a 10-Percent Increase in Cash Crop Prices ..... 195
6.10 Household Income by Source, 1992–96 ........................................ 197
6.11 Main Occupation of Household Head, 1992 and 1995 ............... 198
6.12 Explaining Positive Responses to “Did You Sell Your
Output?” ....................................................................................... 199
6.13 Results from the 1993 and 1995 Surveys ...................................... 200
6.14 Modeling District Spreads .............................................................. 201
7.1 Summary Statistics for Ugandan Firms, Pooled Data,
1996–97 .......................................................................................... 211
7.2 Investment Regressions for All Ugandan Firms, 1995–97 ......... 213
7.3 Profit Rate Regressions, Pooled Data for Cameroon,
Ghana, Kenya, Zimbabwe, and Uganda ................................. 216
List of Tables, Figures, and Boxes 477
A7.1 Investment in Machinery and Equipment by African Firms .... 228

A7.2 Investment Regressions for Small and Large Ugandan
Firms ............................................................................................. 229
8.1 Productivity Levels by Firm Characteristics ................................ 241
8.2 Efficiency Levels of Exporters in Five African Countries .......... 242
8.3 Real Productivity Growth ............................................................... 243
8.4 Efficiency Growth of Exporters in Five African Countries ........ 244
8.5 Nominal Exports Value and Shares by Destination, 1995–97 .... 247
A8.1 Distribution of Sample by Categories, 1997 ................................. 255
A8.2 Summary Statistics of Variables ..................................................... 256
A8.3 Real Output Growth by Firm Characteristics .............................. 257
A8.4 Productivity Levels by Firm Characteristics ................................ 258
A8.5 Real Productivity Growth ............................................................... 259
A8.6 Regression of Productivity Growth ............................................... 260
A8.7 Summary Statistics of Exporters, 1995–97 .................................... 260
A8.8 Exporting Status, 1995 versus 1997 ............................................... 261
A8.9 Nominal Export Growth Decomposition, Selected African
Countries ...................................................................................... 262
A8.10 Probit Models of the Decision to Export, Uganda and
Cameroon, 1997 ........................................................................... 263
A8.11 Output Elasticities Used in Computing the TFP, 1995–97 ......... 264
A8.12 Estimated Parameters of the Frontier Production Function ...... 264
9.1 Central Government Revenues, 1991/92–1998/99 ..................... 272
9.2 Marginal Effective Tax Rate on Capital for Ugandan Firms ...... 284
9.3 Marginal Effective Tax Rate on Cost of Production for
Ugandan Firms ............................................................................ 289
9.4 Marginal Effective Tax Rate on Capital for Foreign Firms ........ 290
9.5 Marginal Effective Tax Rate on Cost of Production for
Foreign Firms ............................................................................... 291
A9.1 Consumption Goods and Corresponding Tax Rates .................. 304
A9.2 Extended Gini Coefficients of Taxes before Reforms, 1992 ........ 306
A9.3 Extended Gini Coefficients of Taxes after Reforms, 1995–96 ..... 307
A9.4 Summary of Welfare Dominance Test Statistics, 1992 ................ 308
A9.5 Summary of Welfare Dominance Test Statistics, 1995–96 .......... 309
A9.6 Business Taxes in Uganda ............................................................... 310
A9.7 Nontax Parameters for Uganda ...................................................... 311
A9.8 Marginal Effective Tax Rate on Capital for Small Ugandan
Firms ............................................................................................. 312
A9.9 Business Tax Provisions Applicable to Manufacturing and
Tourism in Uganda, Kenya, and Tanzania, 1998 .................... 313
A9.10 Summary of Firm Survey Results on Tax Administration ......... 314
10.1 Sample Characteristics .................................................................... 322
10.2 Comparison of Corruption and Other Costs ............................... 324
10.3 Corruption and Investment ............................................................ 324
10.4 Characteristics of Firms that Reported Positive Bribes .............. 326
10.5 Corruption Regressions .................................................................. 327

10.6 Effects on Corruption of Changes in Firm Characteristics ........ 329
10.7 Partial Correlation between Connection Costs and Bribery ...... 332
10.8 Differences in Tax Assessment and Corruption .......................... 334
11.1 Official Enrollment Data from Government-Aided Primary
Schools, 1987–97 .......................................................................... 347
11.2 Enrollment Data from Surveyed Schools, 1991–95 ..................... 348
11.3 Recurrent Budget Allocation for Education, 1991–97 ................. 349
11.4 Summary of School Income Data, 1991–95 .................................. 350
11.5 Mean Parental and Government Contribution to School
Income Per Student, 1991–95 ..................................................... 352
11.6 Median Parental and Government Contribution to School
Income Per Student, 1991–95 ..................................................... 353
11.7 Parental and Government Contribution to Total School
Income, 1991–95 .......................................................................... 353
11.8 Average Capitation Grant Per Student, 1991–95 ......................... 355
11.9 Average Tuition Per Student, 1991–95 .......................................... 356
11.10 Contributions to Teachers’ Salaries, 1991–95 ............................... 358
11.11 Average Government Contribution Per Student Reaching
Schools by Subregion, 1991–95 .................................................. 360
11.12 Average Parental Contribution Per Student by Subregion,
1991–95 ......................................................................................... 361
11.13 Impact of Decentralization on the Flow of Capitation Grants
to Schools, 1991–95 ...................................................................... 362
11.14 Recurrent Budgetary Allocations for Health, 1991–97 ............... 364
12.1 Predicted Probabilities from the Logit Model for School
Enrollment .................................................................................... 375
12.2 Reduced Form Household Earnings Functions with
Community-Level Fixed Effects ............................................... 382
12.3 Probabilities of Engaging in Income-Generating Activities ...... 385
12.4 Household Earnings Functions with Community-Level
Fixed Effects and Endogenous Labor Variables ..................... 389
12.5 Decomposing the Effect of Education on Expected
Household Earnings ................................................................... 392
A12.1 Multinomial Logit Model for School Attendance for
Children Ages 5–14, 1992 ........................................................... 401
A12.2 Probit Models for Engaging in an Income-Generating
Activity ......................................................................................... 402
13.1 Number and Types of Health Facilities, Selected Years ............. 410
13.2 Staffing Ratios, 1972 and 1996 ........................................................ 412
13.3 DLYs Lost due to Mortality, Selected Causes of Death,
1995 and 1996 ............................................................................... 415
13.4 Use of Curative Services, 1989, 1992/93–1996/97 ...................... 425
A13.1 Numbers of Health Units, 1986 and 1996 ..................................... 436
A13.2 HIV/AIDS Funding, 1996 ............................................................... 437
List of Tables, Figures, and Boxes 479
A13.3 Reporting of Illness among Children, 30 Days Prior to

Survey, 1992/93–1996/97 ........................................................... 437
A13.4 Annual Per Capita Household Medical Expenditure by
Income Quartile, 1992/93–1995/96 .......................................... 437
A13.5 Probit Estimations of Illness and Use of Modern Curative
Care ............................................................................................... 438
A13.6 Simulations Using Probit Results for Use of Modern
Curative Care ............................................................................... 439
A13.7 Probit Estimations of Use of Preventive Services, 1995/96
and 1997/98 ................................................................................. 440
A13.8 Orphanhood and Indicators of Child Welfare, 1995/96 ............ 441
A13.9 Probit Estimations of Use of Social Services by Children,
1995/96 ......................................................................................... 442
A1 Summary Information on the Household Surveys in
1992/93–1997/98 ......................................................................... 464
B1 Private Sector Enterprises Based on the 1996 Updated
Industrial Census ........................................................................ 468
B2 Distribution of Establishments and Employment Within the
Five Selected Industrial Sectors, 1996 ...................................... 470
B3 Characteristics of the Firms in the Sample ................................... 471
B4 Distribution of Establishments and Employment of the
Firms Included in the Survey Sample ...................................... 472
Figures
3.1 The Official/Interbank and the Parallel/Market Exchange
Rates, 1985–98 ................................................................................ 55
3.2 Actual and Counterfactual Government Budgetary
Operations, 1994/95–1995/96 ..................................................... 66
3.3 Short-Term Fiscal Response to Increased Inflation, Fiscal
Years 1992/93–1997/98 ................................................................ 71
4.1 Poverty in Uganda, 1992 and 1997/98 ............................................ 85
4.2 Poverty Incidence Curves, 1992–97 ............................................... 101
4.3 Growth and Redistribution Decomposition, 1992–1997/98 ...... 106
5.1 Cumulative Distribution of Income, 1992 and 1999 ................... 140
6.1 Marketed Share, Cumulative Frequency by Share of Crop
Marketed, 1992/93 ...................................................................... 180
6.2 Marketing of Crops Other Than Cotton and Coffee, 1992 ......... 182
6.3 Average Gross Margin between District and Local
Market Prices, 1992 ..................................................................... 184
7.1 Investment and Profit in Uganda and Other African
Countries ...................................................................................... 219
7.2 Ranking of Constraints to Investment, 1998 ................................ 221
7.3 Ranking of Constraints to Future Operations and Growth
in 1994 ........................................................................................... 222
8.1 Main Constraints to Increased Exports ........................................ 250

8.2 Main Constraints to New Exporters ............................................. 251
A9.1 Concentration Curves for Main Taxes before Reform ................ 302
A9.2 Concentration Curves for Main Taxes after Reform ................... 303
10.1 Corruption and Growth .................................................................. 330
A10.1 Ranking of Constraints to Investment by Firm
Category, 1998 .............................................................................. 336
A10.2 Distribution of Firms According to Logarithm of Bribe
Payments in U.S. Dollars ........................................................... 338
A10.3 Distribution of Firms According to Bribe Payments .................. 338
A10.4 Correlation between Graft and Excess Cost of Telephone
Connection ................................................................................... 339
A10.5 Partial Correlation between Graft and Connection Costs
to Public Grid ............................................................................... 339
13.1 Immunization Coverage of Children Aged 12–24 Months,
1994/95–1998/99 ......................................................................... 421
13.2 Percentage of Income Quartile Reporting Illness in the
Past 30 Days, 1992/93 and 1997/98 ......................................... 423
A13.1 Life Expectancy at Birth for Selected East African
Countries, 1960–95 ...................................................................... 433
A13.2 HIV Prevalence in Women Attending Prenatal Clinics,
1985–97 ......................................................................................... 434
A13.3 Percentage of Lowest- and Highest-Income Quartiles
Using Curative and Preventive Care, 1995/96 ....................... 435
Boxes
3.1 Cash Flow ............................................................................................ 59
3.2 Arguments for the Coffee Stabilization Tax ................................... 69
3.3 Arguments Against the Coffee Stabilization Tax .......................... 70
9.1 Capital Taxes ..................................................................................... 282
1
Index
Accountability: for education spending, Bank of Uganda: fiscal operations of, 59,
344, 366–68; for health services, 366, 60, 65; foreign exchange market and,
368, 414, 431 55–56, 68, 77; government savings
with, 69; treasury bills and, 73
Agricultural production: changes in ex-
tent of, 155–59; estimation of, 145–47, Banks: closing of, 226; effect of oppor-
170–71. See also Rural sector; Rural tunism on, 25, 27; expectations of
households firms regarding, 225–26; reserve re-
quirements of, 72–74; treasury bills
AIDS/HIV, 2, 10; economic impact of,
and, 73
416–17, 433; effect on health sector of,
417, 433; efforts to combat, 86, 417–18, Birth control, 424
433, 457; fertility rate and, 419; fund- Birth rate, 419
ing for, 437; orphanhood and, 422; sta-
tistics regarding, 407–8, 415–16, 434 Brazil, 69
Allied Democratic Front, 22 Breastfeeding, 421, 422
Amin, Idi, 1, 15; deportation of Asian Bribes: case studies on, 331–34; collection
business community by, 3, 16, 32; for- of information on, 321; effects of, 328–
eign investment policy of, 32; over- 31; firms’ experience with, 319; inci-
throw of, 16 dence of, 322–23; level of, 323–28. See
also Corruption
Appleton, Simon, 6, 10, 43
Budget Framework Paper (BFP), 58, 60
Arbitrage model, 183
Burden of disease studies, 414–15
Asians: deportation of, 3, 16, 32; prop-
erty confiscated from, 54
Calorie requirements, 116–18
Assets, shift abroad of, 27–31
Cameroon: firm investments in, 210, 212;
profit rates in, 216, 217; trade in, 247–
Baganda, 17 51, 263
481
482 Index
Capital flight: effects of, 27–30; measures Coffee stabilization tax: arguments
of, 30; predicted change in, 29 against, 70; arguments for, 69; coffee
farmers and, 276; Gini coefficient of,
Capital investment: explanation of, 282–
280
83; marginal effective tax rate and,
283–86 Collier, Paul, 5, 10
Capital taxes, 282. See also Taxes Collier-Dollar cross-country analysis, 43
Cash budget, 64 Collier-Hoeffler model, 21, 22
Cash crops: effect of price changes in, Collier-Hoeffler-Pattillo model, 30
194–95; poverty changes and, 105–11,
125 Common Market for Eastern and South-
ern Africa (COMESA), 33
Cash flow system: coffee boom and, 68–
71; data lags for compiling, 63; effects Competition, 223
of, 74–77; external shocks and, 68–71; Concentration curves: after reform, 303;
fiscal shocks and, 66–67; management explanation of, 278, 280; for main tax
of, 60, 64–66; out-turn, 61–63; review categories, 280, 303; before reform, 302
of, 59–60
Consumer goods, 278–79, 304–5
Cassava: marketing of, 178, 180; produc-
tion of, 128 Consumer price index (CPI), 115
Chad, 248, 251 Consumption goods, 304–5
Chen, Duanjie, 8 Contraception, 418, 424
Childbirth, 419 Coordination of Poverty Eradication
Project, 84n
Child labor, 377, 381–82
Corruption: conclusions regarding, 334–
Children: curative care for, 427–29; effect
35; constraints as perceived by firms
of AIDS on, 417, 420; health trends af-
and, 320, 336–37; data on, 321; distri-
fecting, 408, 420, 421; immunization of,
bution of bribes across firms and, 325,
408, 420, 421; malaria in, 418; mortal-
338; effects of, 320, 328–31, 454; efforts
ity among, 86, 407; nutrition in, 408,
to reduce, 9, 227, 456; incidence of, 322–
421–22; orphanhood among, 422, 429–
23; level of, 323–28; overview of, 319–
30, 441; reporting of illness among, 437;
20; in public services delivery, 331–33,
use of social services by, 442–43. See
339; return on investments and, 224;
also Education
in tax paying, 333–34; in trade, 333
Chloroquine, 418, 419
Cotton sector: marketing in, 178; mea-
Christians, 17 surement units for, 187; production in,
124, 128
Civil war: effects of, 21; risk of, 17, 18
Coffee Marketing Board (CMB), 34–36, 51 Credit, to trade export and food crops,
187–88
Coffee sector: boom in, 2, 6, 35, 39, 49,
68, 70, 109, 112; exports and, 459; lib- Credit markets: agricultural production
eralization of, 34–36, 49, 53; marketing and, 131–33; constraints and, 148; op-
in, 178; measurement units for, 187; eration of, 143–45, 163–65
prices in, 54, 109; production in, 124, Crime: demobilization and, 23; reduction
128; taxes and, 32, 69, 70, 124, 275, 276 of, 227; as risk to firms, 224–25
Index 483
Crop market model: credit and, 187–88; District markets, 178

crop effects and, 186–87; crop model es-
District Service Commission, 411
timates and, 189–90; differences among
communities and, 188–89; explanation
of, 184–85; infrastructure and, 185–86; Economic growth: challenges to, 45; for-
physical units of measure and, 187; eign aid and, 43, 45; impact of social
prices and, 185; spatial arbitrage, 182– and political disorder on, 17, 19–20;
84, 202; state variables and, 188 investment and, 207–8; level and com-
position of, 20; poverty reduction and,
Crop markets: changing domestic de- 83–84, 123. See also Sustainable growth
mand and, 201–2; conclusions and
policy implications of, 202–3; determi- Economic liberalization: coffee, 34–36;
nants of market participation and, conclusions regarding, 44–45; invest-
191–94; development of, 195–203; in ment policy and, 36–37; privatization
early 1990s, 178–80; effects of price and, 37–38; productivity and, 244–46;
changes on household welfare and, reform process and, 1, 41; relationship
194–95; in industrialized vs. develop- between reconstruction and, 15; tax
ing countries, 180–81; nature of, 180– reform and, 276–77; trade and, 31–34,
83; overview of, 7, 177–78; participa- 275. See also Trade liberalization
tion in, 7, 196–99, 202; results of, Economic welfare, 87–89
199–200; transfer costs and, 188, 191,
200–201. See also Food crops Education: access to, 372–78, 401; bud-
get allocations for, 9–10, 349; conclu-
Curative care: for children, 427–29; sions and policy changes in, 366–68;
health services and, 423–26, 438; in- enrollment and, 344, 347–49, 366, 372–
come and, 428, 435; providers of, 431; 78, 395–97; as government priority,
use of, 438, 439. See also Health care 371, 372; income and, 141–42, 373,
facilities; Health services 381–95; Mincerian returns to, 379, 381,
383; parental, 374; parent funding of,
Decentralization: educational spending 344–45, 350–53, 357, 361, 366, 376; pri-
and, 359, 362–63, 367; health services mary, 344, 347–48, 366, 371–402 (See
and, 408, 409, 411, 413, 414, 431–32; also Primary education); productivity
institutional reform and, 4 and, 147, 387–95; public spending of,
347–63; quality of, 396, 397; rebellion
Decomposition analysis, 248–49 and, 23–24; returns to, 378–87; student
Deininger, Klaus, 6, 7 performance and, 398–99. See also
Schools
Demilitarization, 23–24
Educational spending: accountability
Demobilization, 23–24 and, 344, 366–68; availability of data
Democratic Republic of Congo, 2, 22, 456 on, 349–50; impact of decentralization
on, 359, 362–63, 367; for primary
Departed Asians Property Custodian schools, 350–59, 362; regional varia-
Board, 36 tions in, 359–61; for teacher salaries,
Department of Statistics, 84n 349, 350, 357–59, 366. See also Primary
education; Schools
Depreciable assets, 300
Electric power sector, 224, 227
Disease. See AIDS/HIV; Health care fa-
Entandikwa, 133
cilities; Health issues; Health services;
Illness; Malaria Enterprise start-ups, 150–52, 173
484 Index
Equipment, investment in, 210, 214, 228 tion and, 8, 238–46, 255. See also Invest-
ment; Trade liberalization
Ethics, 25–26
Exchange rate: expectations of firms re- Fiscal adjustments, short-term, 72–74, 76,
garding, 225; managing floating, 54–56; 77
reforms in, 50–52; unification of, 52–54 Fiscal shocks, 66–67
Excise taxes, 277n Flexible accelerator model of investment:
Export crops, 177, 187 application of, 212–15, 277n; explana-
tion of, 211–12
Export sector: bribes and, 333; competi-
tiveness in, 458–59; decision to enter, Food crops: credit and, 187; demand for,
263; efficiency levels in, 242; growth 196, 201; domestic participation in, 202;
decomposition, 262; impact of liberal- production of, 124, 131, 177; transac-
ization on, 38–39, 246–53; from 1995- tion costs for, 177. See also Crop mar-
1997, 261; productivity in, 243–46; re- kets
moval of taxation and, 3; summary Food poverty line: derivation of, 90, 91;
statistics of, 260. See also Trade liberal- use of, 99, 100, 110, 116–17
ization
Foreign aid, 39, 41, 43–45
Export taxes: coffee, 276; overview of, 8;
removal of, 271; switch to import taxes Foreign exchange: legalization of paral-
from, 32–33, 275. See also Taxes; Tax lel market in, 49, 52–56; reforms in, 50–
reform; Trade liberalization 51
Extension services, 136–37, 166–67 Foreign Exchange Operations (FEO), 59,
60
Farming. See Rural households; Rural Foreign investment, 36–37
sector
Fractionalization, 17, 22, 23
Fertility rate, 419
Fuel tax revenues, 276, 281
Fertilizers: demand functions for, 172;
Full information maximum likelihood
use of, 131, 148–49
(FIML) estimator, 246
Firms: analysis of, 3–4; competitive en-
vironment and, 223; costs beyond con-
Gabon, 248, 249, 251
trol of, 223–24; effects of corruption on,
319–39 (See also Corruption); impact of Gauthier, Bernard, 8
taxation and foreign, 288, 290–92, 313;
Gender, income and, 383–84, 386
incidence of tax policies on, 9; invest-
ment and age and size of, 213–14; in- Ghana, 41; firm investments in, 210, 212;
vestment rates and, 209–11, 218–20, profit rates in, 216, 217
226–27; investment regressions for,
Gini coefficients: of coffee stabilization
212–15, 229–30; marginal effective tax
tax, 280; explanation of, 278n; inequity
rate for, 281–89; output and productiv-
in consumption per capita, 104, 105,
ity growth in, 239–40, 242; overview
134, 134n; of taxes, 278, 280, 306, 307
of, 7–8; perception of constraints to,
220–23; policy credibility views of, Government: constraints on efficiency of,
225–26; profit rates in, 216–20, 226; risk 26–27; economic activity and, 137; nor-
affecting, 224–25; status of, 3; survey mative view of, 345; overview of, 8–9;
of, 3, 238, 252, 467–72; trade liberaliza- spending by postconflict, 24–25
Index 485
Government revenue: data regarding, tal care, 419, 427, 429, 434; for young
272–75; effort to rebuild, 272; tax re- children, 427–29
form and, 276–77
Health unit management committees
Graduated personal tax (GPT), 277 (HUMCs), 414
Granger causality test, 246 Henstridge, Mark, 5
Gross domestic product (GDP): effect of Highway construction. See Road con-
social disorder on, 19, 20; export shares struction; Transportation
of, 41; growth in, 271, 275; investment
HIV. See AIDS/HIV
as share of, 19, 20, 40; liberalization and,
38–39; share of tax revenue in, 8, 457 Households: changes in mean consump-
tion per capita in, 87–89; education and
Gross-of-tax rate of return on capital,
characteristics of, 377, 456; engaged in
300–301
farming, 178, 179; female-headed, 141–
Growth theory, 208 42, 377, 383–84, 386, 390; health expen-
ditures by, 437; income in, 196, 197; is-
sues related to, 6–7; nonagricultural
Health care facilities: access to, 407–9,
enterprise start-ups by, 150–52; occu-
425–26, 428; availability of data on, 345,
pation of head of, 198; poverty infor-
363–64, 366, 367; births in, 419–20; con-
mation and, 83–87; tax incidence
clusions and policy changes in, 366–
analysis and, 9, 278–81, 296–98, 302. See
68; description of, 346–47; govern-
also Rural households
ment, 424, 430; medical personnel in,
411, 412, 432; number and type of, 409– Household surveys: budget survey, 84n,
11, 436; qualitative observations of, 89n; integrated household surveys, 84,
365–67; quality of, 408, 413–14; user 87, 88, 92, 93, 101–6, 109, 111, 113, 115,
fees for, 408–9, 413, 414, 431; utiliza- 116, 278, 463–65; monitoring surveys,
tion of, 413, 424–26 84, 87–92, 94–97, 101–6, 109, 111, 463–
66; national household survey of 1999/
Health insurance, 409, 431
2000, 463, 466
Health issues: AIDS/HIV and, 2, 10, 86,
Huber-White correction for hetero-
407–8, 415–18, 422, 437; malaria and,
skedasticity, 245
408, 418–19, 430, 432; nutrition and,
408, 421–22; orphanhood and, 422, Hydropower, 227
429–30, 441
Health services: accountability for, 366, Illness: demand for curative care and,
368, 414, 431; burden of disease stud- 427–29; income and, 423–25; poverty
ies and, 414–15; conclusions regarding, and, 423–25; reporting of childhood,
430–33; curative and preventive ser- 437. See also AIDS/HIV; Health care
vice demand and, 423–26, 435; decen- facilities; Health issues; Health ser-
tralization and, 408, 409, 411, 413, 414, vices; Malaria
431–32; econometric analysis and, 426–
Immunization: access to, 408; demand
27; government spending for, 407, 430;
for, 429; econometric analysis and,
household expenditures for, 437;
426–27; providers of, 424; trends in,
household outcomes and, 10; immu-
420, 421
nizations and, 429; improvements in,
407; maternal and child health and, Import taxes: revenue from, 276; switch
419–20; overview of, 407–9; perfor- from export to, 32–33, 275. See also
mance monitoring in, 432; for prena- Taxes; Tax reform; Trade liberalization
486 Index
Income: curative care and, 428, 435; de- Investment Code (1991), 277
terminants of household-level growth
Investment constraints: competitive en-
in, 169; education and, 141, 142, 373–
vironment and, 223; conceptual frame-
75, 381–95; from farming, 196, 197;
work for, 218–20; corruption as, 336–
gender and, 383–84; health expendi-
37 (See also Corruption); costs beyond
tures and, 437; illness and, 423–25;
firms’ control and, 223–24; firms’ per-
intertemporal changes in, 137–43
ceptions of, 220–23; overview of, 209;
Income taxes, 275, 277n. See also taxes policy credibility and, 225–26; profit
Incumbent effect, 248, 249 rates and, 216–18; ranking of, 220–22;
risk and, 224–25
Industrial census, 468
Investment equation, 231–32
Infant mortality, 407
Investment licensing, 36–37
Inflation: policy to stabilize, 56–58, 71–72,
76; short-term fiscal response to, 68, 71 Investment response: flexible accelerator
model and, 211–12; investment data
Infrastructure: access to, 166; as firm con- and, 209–11, 228; regression results
straint, 223–24; improvement needs and, 212–15, 229–30
for, 227; investment expenditures on,
24–25; market models and, 185–86;
rural, 135–37, 166 Kasekende, Louis, 5
Institutional Investor risk ratings, 28, 30, Kenya: education in, 372; fuel tax in,
455 276; horticultural export industry of,
458–59; investments in, 210, 212, 455;
Institution building, 25–27
profit rates in, 216, 217; taxes in, 9,
Integrated household survey (IHS), 84, 290, 291, 301
87, 88, 92, 93, 101–6, 109, 111, 113, 115,
116, 278, 373, 400. See also Household
Labor, hired, 149, 172, 178
surveys
Labor productivity, 240–44, 254
International Coffee Agreement export
quota system, 34 Land markets: changes in functioning of,
163–65; importance of, 133–35
International Development Research
Centre of Canada, 51 Land rights, 133–35
International Labour Organisation, 302 Larson, Donald, 7
International Monetary Bank (IMF): Liberalization. See Economic liberalization
commitment control system and, 76;
Life expectancy, 408, 433
reform agreement with, 51, 53, 56, 72
Livestock: ownership of, 130–31, 167; use
Inventories, 283
of technology for, 130
Investment: conclusions and policy rec-
Living standards, 84, 89, 100, 102, 112
ommendations for, 226–27; economic
growth and, 207–8; flexible accelera- Lord’s Resistance Army, 22
tor model of, 211–15; impact of lib-
Lorenz curve, 278n
eralization on, 38–39; in machinery
and equipment, 210, 214, 228; nature
of, 7–8; policy for, 36–37; rates of, Machinery: investment in, 210, 214, 228,
226–27 287; tax on, 283
Index 487
Macroeconomic policy: aspects of, 5–6, Ministry of Health, 408, 411, 424
49; budget discipline costs and, 74–75;
Ministry of Planning and Economic De-
cash flow and, 59–66; commitment to
velopment, 52
spend and, 75–76; inflation targeting
and, 71–72; reform measures and, 5– Monetization, 74
6, 50; short-term fiscal adjustment vs. Monitoring surveys, 84, 87–92, 94–97, 101–
monetary policy and, 72–74, 77 6, 109, 111. See also Household surveys
Macroeconomic stability: achievement Morocco, 249
of, 49–50, 56–58, 74; cash flow system
and, 76–77; recommendations for, 51 Mortality: from AIDS, 415; child, 86, 407;
discounted life years due to, 414, 415;
Maize, 126–27 infant, 407; from malaria, 408, 418;
Makerere University, 458 maternal, 419
Malaria: economic costs of, 418–19; ef- Museveni, Yoweri, 1, 44; economic policy
forts to combat, 430, 432; morbidity and, 50, 51, 64; education issues and,
and mortality from, 408, 418 371, 396
Malawi, 372
National Resistance Movement (NRM),
Mangoes, 129
5, 11, 459; demilitarization and, 23; eco-
Manufacturing, 313 nomic policy and, 22, 50–51, 76;
formation of government by, 15; taxa-
Marginal effective tax rate (METR):
tion and, 295
analysis of, 295–96; on capital, 282–86,
299, 312; on cost of production, 279n, Net entry effect, 248, 249
287–89, 291–92, 301–2; cross-border
Net-of-tax rate of return on capital, 300
comparisons of, 288, 290–92; disper-
sion, 301; effect of compliance and tax Nonagricultural enterprise start-ups,
administration on, 280, 292–95; expla- 150–52, 173
nation of, 279, 298–302; for firms, 281–
Noncommercial risk, 225
90; tax reform and, 286–87; use of, 279
Nutrition, 408, 421–22
Marginal return (MR) curve, 218–20, 224
Maternal health, 408, 419–20
Obote, Milton, 1, 17
Matooke, 127–28, 186
Okidi, John, 6
Matovu, John, 8
Opportunism: banks and, 25, 27; high-
Mean consumption per capita: adjusted vs. low-, 25–26; in private sector, 454;
comparison of, 113–15; changes in, 87– in public sector, 454
89; living standards and, 103–4
Orphanhood: AIDS and, 422; child wel-
Military expenditures, 24 fare indicators and, 441; health service
demand and, 429–30
Millet, 127
Output: by firm characteristics, 257; trade
Mincerian returns to education, 379, 381,
liberalization and, 239–40, 242, 246
383
Ministry of Finance and Economic Plan-
Paris Club, 41
ning: actions of, 58, 64–65, 67, 76; com-
mitment control system and, 76 Payroll tax, 288n
488 Index
Peace: opportunism and, 25; restoration Primary education: enrollment data for,
of, 21–24, 453 347–49, 366, 372–78, 395–97; as govern-
ment priority, 371; parent funding of,
Petroleum tax revenue, 276, 281
344–45, 350–53, 357, 361, 366, 376; pro-
Plow ownership, 130–31 ductivity effects and, 387–95; public
spending for, 350–59, 362; returns to,
Polarization, 22
378–87. See also Education; Educational
Political disorder: causes of, 16–17; im- spending; Schools; Universal primary
pact of, 17, 19, 21 education (UPE) initiative
Postconflict economy: capital flight and, Privatization: effects of, 37–38, 45; expec-
27–31; institution building priorities tations of firms regarding, 225; as
in, 25–27; interest in, 1; overview of, policy priority, 227
5–6; public spending priorities in, 24–
Production cost, 279n, 287–89, 291–92,
25
301–2
Poverty: agricultural growth and, 105–
Production function, 254, 264
11, 125; analysis of statistics for, 102–5;
calculating estimates of consumption Productivity: economic reform and, 244–
and, 113–16; coffee sector liberalization 46; education and, 147, 387–90; growth
and, 49; conclusions regarding, 111–13; in, 239–40, 242–46, 259, 260; indexes of,
dynamics of, 6, 454; economic growth 240, 253–54, 264; labor, 240–44, 254; lev-
and, 83–84, 123; foreign aid and, 43– els of, 240–42, 258; output and, 239–
45; health facility use and, 424–25; ill- 40; in rural households, 145–47, 177
ness and, 423–25; interventions to
Profit rates: cost of capital and risk and,
reduce, 99, 99n–100n; nutrition and,
224; investment rates and, 218–20, 226–
421; private consumption per capita
27; regressions of, 216–18
and, 87–89; sectoral decomposition
and, 105–11; by sector of household Public officials, 319
head, 107–8; survey information on,
Public services: bribes paid for, 331–33, 339;
84, 87–92, 94–97, 101–6, 109, 111, 463–
importance of, 456–57; to primary
66 (See also Household surveys); trends
schools, 456 (See also Primary education)
in, 85, 91–102, 123, 125, 142; varying
conceptions of, 85–86
Real cost of financing, 299–300
Poverty incidence curves, 101
Reconstruction, 15
Poverty line: calorie requirements and,
116–18; defining absolute, 89–91; deri- Regional Project for Enterprise Develop-
vation of, 84n, 85, 116–19; food, 90, 91, ment, 209, 467
99, 100, 110, 116–17; nonfood require-
Reinikka, Ritva, 5, 7–10
ments and, 118–19
Repatriation, 30
Poverty statistics: changes in, 94, 98;
sectoral decomposition and, 105–11; Revenue. See Government revenue
types of, 92, 98n–99n
Risk, 224–25
Prenatal care, 419, 427, 429, 434
Road construction, 24–25. See also Trans-
Presidential Economic Council, 51, 53 portation
Preventive care, 423–26, 435, 440. See also Rural households: conclusions regard-
Immunization ing, 152–53; crop market participation
Index 489
and, 193–94; crop market price school survey and, 344–45. See also
changes and, 194–95; efficiency of in- Education; Educational spending;
put use and determinants of factor Health care facilities
demand and, 148–49; hired labor use
Sorghum, 127
by, 149, 172, 178; income growth analy-
sis for, 140–43, 169; income in, 196, 197; Spatial arbitrage model, 182–84, 202
income sources for, 138–40; nonagri- Subsistence farming: reliance on, 3, 177;
cultural enterprise start-ups and, 150– trends in, 124, 125, 178
52; productivity in, 145–47, 177; pro-
file of, 6–7, 178; stylized facts Surveys. See Household surveys;
characterizing, 143–45. See also Crop Uganda enterprise survey
markets; Households Sustainable growth: issues related to, 10–
Rural sector: agricultural output in, 124– 11; poverty reduction and, 123; re-
25; factor markets in, 131–35; histori- quirements for, 209. See also Economic
cal background of, 124; infrastructure, growth
services, and social capital in, 135–37, Svensson, Jakob, 7, 9
166; structure of output in, 125–30;
technology use in, 130–31, 160–62. See
also Uganda Tanzania: cash budget in, 64, 76; educa-
tion in, 372; taxes in, 9, 276, 290, 291,
301
Salaries, teacher, 349, 350, 357–59, 366
Tax administration analysis, 292
Sales tax, 280, 294n, 295
Taxes: arbitrary assessment and audits
Schools: distance to, 376–77; enrollment and, 224; bribery and, 333–34; busi-
data for, 344, 347–49, 366, 372–78, 395– ness, 276, 277, 310, 313; capital, 282;
97; parent funding of, 344–45, 350–53, collection of, 26, 27, 227; excise, 277n;
357, 361, 366, 376; primary, 344, 347– expectations of firms regarding, 226;
48, 350–59; public spending for, 347– graduated personal, 277; income, 275,
63; record keeping for, 348; student- 277n; switch from export to import,
teacher ratio in, 348, 399. See also 32–33, 275; taxpayer compliance and
Education; Educational spending; Pri- administration of, 280, 292–95, 314–15;
mary education value added, 275, 276. See also Export
taxes; Import taxes; Marginal effective
Seeds, 149, 172
tax rate (METR)
Sexually transmitted diseases, 417, 418.
Tax incidence analysis: on households,
See also AIDS/HIV
9, 279–81, 296–98, 302; methods and
Sim-sim, 178, 180 data for, 278–80
Social capital, 137 Tax reform: conclusions regarding, 295–
96; effects of, 9; Gini coefficients before
Social disorder: impact of, 17, 19–21; ori-
and after, 278, 280, 306, 307; impact of,
gins of, 16
286–87; overview of, 271, 275–76; rev-
Social service delivery system: conclu- enue trends and, 276–77. See also Ex-
sions and policy changes and, 366–68; port taxes; Import taxes; Marginal ef-
diagnostic survey and, 346–47; educa- fective tax rate (METR)
tion and public spending and, 347–63;
Tax reforms, 280–81
health facility survey and, 345, 363–66;
public spending increases and, 343–44; Tea, 124
490 Index
Technical efficiency index, 240–45, 253 Uganda Coffee Development Authority,

35
Technology use, 130–31, 160–62
Telecommunications: advances in, 458; Uganda Commercial Bank (UCB), 59, 60
bribery and, 331–33, 339; mobile, 455, Uganda enterprise survey, 3, 238, 252,
458; restructuring of, 38 467–72
TFP (total factor productivity), 240–45, Uganda Manufacturers Association, 467
253, 264
Ugandan Private Sector Foundation, 3–
Tobit regression, 212, 214n, 215n 4, 238, 252, 467
Total unit cost, 240, 241, 243, 244 Ugandan Revenue Authority (URA): data
Tourism, 313 produced by, 59–60, 279; establishment
of, 26, 271, 456; function of, 271
Trade liberalization: bribes and, 333; con-
clusions regarding, 252; effects of, 236– Uganda Participatory Poverty Assess-
37; export response to, 246–52; meth- ment Project (UPPAP), 83, 85–87
ods of examining, 235–36; output and Uganda Programme of Action for Chil-
productivity growth and, 239–40, 242– dren, 422
46; overview of, 31–34, 44; productiv-
ity level and, 240–42. See also Economic United Nations Development Programme
liberalization (UNDP), 372, 421
Trade shocks, 68 Universal primary education (UPE) ini-
tiative: assessment of, 400–401; con-
Transportation sector: improvement
cerns regarding, 396; educational ac-
needs for, 227; marginal effect tax rate
cess following, 372; educational access
and, 283; public spending on, 24–25;
prior to, 373–78, 400; overview of, 371–
as risk to firms, 224
73; school quality and, 395–97; student
Treasury bills, 72–74 performance and, 398–99. See also Edu-
cation; Primary education
Tree crops, 129
Utilities, 227
Tuberculosis, 417
Tumusiime-Mutebile, Treasury Secretary,
Value added tax (VAT): implementation
77
of, 275, 276, 278, 294; nonpayment of,
Turnover effect, 248, 249 292; sales tax vs., 280, 294n, 295
Veterinary services, 137, 167
Uganda: absolute poverty line for, 89–90;
Violence, 137, 168
achievements during 1990s of, 453–54;
contemporary challenges of, 455;
household surveys of (See Household The Way Forward I (Republic of Uganda
surveys); lessons from studying, 2; 2000), 51, 53
nontax parameters for, 311; outlook for,
Welfare dominance analysis: application
453–59; policy challenges for, 44; politi-
of, 278; household incidence analysis
cal rights in, 22–23; profile of rural, 124–
and, 296–98; statistics, 308, 309
37; Regional Program on Enterprise De-
velopment data on, 209; restoration of World Bank: enterprise survey by, 3, 238,
peace in, 21–24, 453; risk of civil war in, 252, 467–72; foreign investor survey by,
17, 18; risk of conflict in, 21–22 467n; poverty rates and, 92; reform
Index 491
agreement with, 51, 56; Regional Project Zambia, 64, 76

for Enterprise Development, 209, 467
Zimbabwe: investments in, 210, 455;
World Health Organization (WHO), 90, profit rates in, 216, 217
98n, 116
REINIKKA & COLLIER
W O R L D B A N K R E G I O N A L A N D S E C T O R A L S T U D I E S
Uganda is rightly regarded as a pioneer of macroeconomic stabilization

and structural adjustment in Sub-Saharan Africa. Uganda’s Recovery:
The Role of Farms, Firms, and Government consists of a series of studies
analyzing the responses of private sector agents—households and
firms—and of the government itself to the reforms implemented since
the late 1980s in a society recovering from a traumatic civil conflict.
Drawing on a wealth of quantitative data from a series of household
Uganda’s Recovery
surveys and from surveys of firms, the book presents an analysis of the
evolution of incomes, poverty, and investment during the 1990s.
Unique in providing comprehensive analysis of policy reform in a
Uganda’s Recovery
Sub-Saharan African country, the book is designed to share the lessons
of reform with a wide audience and stimulate informed debate among and Government
“This book provides a truly remarkable record and a persuasive analysis

of Uganda’s post-conflict reconstruction and sustained economic
liberalization. It helps shed light on the complex interplay of behavior,
policy tradeoffs, and economic management against immense odds. It is
a must read for analysts, policymakers, and development practitioners.”
Benno Ndulu, Lead Economist, The World Bank; former
Executive Director, African Economic Research Consortium
“This excellent book highlights three key aspects of governmental
The Role of Farms, Firms, and Government

behavior which account for Uganda’s remarkable recovery in the last
fifteen years—provision of internal peace, ending of predatory taxa-
tion, and maintenance of fiscal discipline. However, the book is not
complacent and emphasizes the challenges facing Uganda as it goes
from recovery to sustainable growth and poverty reduction.”
Ravi Kanbur, T.H. Lee Professor of World Affairs and Professor
of Economics, Cornell University
EDITED BY
RITVA REINIKKA
THE WORLD BANK
1818 H Street N.W.
Washington, D.C. 20433 USA
PAUL COLLIER
Telephone: 202-477-1234
Facsimile: 202-477-6391
Internet: www.worldbank.org
E-mail: feedback@worldbank.org
THE
ISBN 0-8213-4664-4 WORLD
BANK

Uganda&#39;s Recovery: The Role of Farms, Firms, and Government

Written by

Document Information

Copyright

ISBN

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

ISBN:

Uganda&#39;s Recovery: The Role of Farms, Firms, and Government

Written by

Copyright:

ISBN:

REINIKKA & COLLIER

Uganda is rightly regarded as a pioneer of macroeconomic stabilization

“This book provides a truly remarkable record and a persuasive analysis

“This excellent book highlights three key aspects of governmental

The Role of Farms, Firms, and Government

The World Bank

All rights reserved

Cover art: Hand shield, Uganda.

Library of Congress Cataloging-in-Publication Data

Foreword ............................................................................................................. xiii

Map of Uganda .................................................................................................. xvi

Part I. Postconflict Recovery and Macroeconomic Reforms ....... 13

3. Exchange Reforms, Stabilization, and Fiscal Management ............. 49

Part II. Household Responses and Constraints ........................... 81

5. Rural Households: Incomes, Productivity, and Nonfarm

6. Crop Markets and Household Participation ..................................... 177

Part III. Firm Responses and Constraints ................................... 205

8. Productivity and Exports ...................................................................... 235

Part IV. Government Performance from a Beneficiary

10. The Cost of Doing Business: Firms’ Experience

Conclusions .............................................................................................. 334

11. Recovery in Service Delivery: Evidence from Schools and

13. Combating Illness .................................................................................. 407

Part V. Sustainability and Lessons ............................................ 451

List of Tables, Figures, and Boxes ................................................................. 475

Index ................................................................................................................... 481

Simon Appleton Lecturer, University of Nottingham; Research

Duanjie Chen Associate Director, International Tax Program,

Paul Collier Director, Development Research Group, World

Klaus Deininger Senior Economist, Development Research Group,

Bernard Gauthier Professor, Institut d’Économie Appliquée, École

Mark Henstridge Economist, African Department, International

Paul Hutchinson Researcher, Economics Department, University of

Louis Kasekende Deputy Governor, Bank of Uganda, Kampala

Donald Larson Senior Economist, Development Research Group,

John Matovu Economist, IMF Institute, International Monetary

John Okidi Senior Research Fellow, Economic Policy Research

Ritva Reinikka Research Manager, Development Research

Jakob Svensson Assistant Professor, Institute for International

The economic reforms implemented in Uganda under the leadership of Presi-

vulnerable households. The objectivity and clarity of the findings in this

Uganda’s experience provides several interesting lessons. First, the wealth

1998 in which quantitative and qualitative data on manufacturing,

explores the extent to which the Ugandan experience is applicable to other

Postconflict Recovery and Macroeconomic Reforms

necessary, at the expense of sector allocations. Third, a tradeoff has occurred

firms have been hindered in their ability to respond to increased competition

The chapter also examines the resulting incidence of tax policies on

central government. By contrast, health sector improvements have been much

Sustainability and Lessons

by initiating active policies to curtail corruption. This agenda will undoubt-

Postconflict Recovery and

Reconstruction and Liberalization:

This overview chapter analyzes Uganda’s performance after 1986 from

The Inheritance of Disorder

Societies with a homogenous ethnic and religious makeup and societies

1. Note this qualification to Uganda’s generally benign social composition. Al-

Factors determining risk Contribution to risk

• Transactions become disrupted as the means to enforce contracts start

Table 2.2. The Level and Composition of Economic Activity, Selected

Economic activity 1971 1986 1994 1997 1999

borrow commercially. As foreign flows to the government ceased, an illegal

The Restoration of Peace

societies, to understand the various elements that contributed to this en-

Uganda's Recovery: The Role of Farms, Firms, and Government

Uganda's Recovery: The Role of Farms, Firms, and Government